The Reserve Bank of India is the name given to India's central bank (RBI). The Reserve Bank of India develops and forecasts banking policies. They recently came to light by raising the repo rate by 25 basis points. The RBI has raised the repo rate for the second time in four years. Today, the rate is 6.50%, which is 50 basis points higher than it was four years ago, when it was 6.00%.
What exactly is a repo rate?
A repo rate is the interest rate at which the central bank lends money to commercial banks when their balances fall below a certain level. The central bank determines this balance (RBI). If a commercial bank is unable to maintain such a balance, it can borrow money from the RBI at interest.
Why did the RBI raise the repo rate?
The RBI raised interest rates in order to meet their goal of keeping inflation around 4%. By increasing this rate, a series of events occurs. Because the repo rate is so high, banks will borrow less money from the RBI. As a result, they will be unable to lend to the customer. They will lend the remaining funds at a higher interest rate. As a result, many customers will avoid taking out a loan, reducing demand. In the long run, this will reduce inflation.
Should the rise in this rate be cause for concern?
Yes. When the RBI raises the repo rate, commercial banks raise the interest rates on various loans such as personal loans and home loans. This impact is then felt by the customer, as interest rates rise, causing the EMI to rise. Yes, if your loan has a floating rate of interest, the EMI will be adjusted based on market conditions as well as when the RBI raises the repo rate. As a result, the customer's debt burden will be higher than before. With the debt load increasing, it may be prudent to consider partially or fully repaying loans."""
