How does Repo Rate affect us?

Not too long back, you must have come across headlines saying “RBI cuts interest rates”, indicating that the Reserve Bank of India has cut down the repo rate by 25 basis points (bps), from 6.25% to 6%. But what exactly is repo rate and how does a rate cut affect you? Read on to learn more

What do you mean by Repo Rate?

When we are in need of money, we take loans from banks and for the loan, we need to pay a certain amount of money as interest. This is termed as the cost of credit. So what do banks do when they are in need of money? They borrow money from RBI. The rate at which banks borrow money from RBI by selling their government securities to the Central Bank (RBI) is known as the Repurchase Rate or better known as the 'Repo Rate'.

Before borrowing money from RBI, banks enter into an agreement with RBI to repurchase the pledged Government securities in future at a predetermined rate which is managed by the RBI. Repo rate can also be called as the cost of credit for the banks.

Current Rates

At present, the Reserve Bank of India (RBI) has cut the repo rate by 25 basis points (bps) from 6.25% to 6%. Consequently, now the reverse repo rate is adjusted at 5.75%. As of Oct 2016, the Cash Reserve Ratio or CRR is set at 4 percent. The current SLR (Statutory Liquidity Ratio) is kept at 20 percent.

So, how does Repo Rate affect us?

• Home Loan: With the reduction in Repo rate, banks can borrow more money from the RBI at a lower interest rate. Reduced rates will directly translate to a reduced burden on new home loan borrowers. Existing home loan borrowers who are under floating rate will have to wait till their reset period for enjoying the rate cuts. This will also encourage people to transfer balance to existing lenders.

We can also expect a boost in sales in the housing sector, which can boost growth in related sectors as well. This would be the best time to buy your dream home with lower EMIs.

• Savings Account: With the rate cut, banks will be forced to provide loans at a depreciated rate. So to balance the financial statements, banks will reduce the interest rates on savings account & deposits. This will have a negative impact on various money instruments. Hence it’s advisable to switch to mutual funds which can offer multiple returns.

• Long-Term Bond Fund: Though bonds are positively related to repo rate, it has an inverse relationship with bond prices. This means bond prices will get positive movement when there are consecutive rate cuts. This will give good scope for debt investors who will enjoy high returns on their long term maturity debt funds.

• Equities: Lower interest rates on loans will enable more business industries to expand. This, in turn, brings more opportunities in the equity market for investors to grab some high profits.

These are few of the areas where the rate cut is going to have a direct impact on your finances. Act now and take control of your money for the benefit of your future. Avail Vijaya Bank’s Merchant Banking services to invest in beneficial mutual funds today!