How The Repo Rate Affects Homebuyers

DEFINITION: Repo rate is the interest rate at which a nation’s central bank (in India, the Reserve Bank of India) loans money to commercial banks in the event of a funding shortage. Monetary authorities use the repo rate to manage inflation.

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DESCRIPTION: When there is inflation, central banks raise the repo rate to discourage banks from borrowing from them. In the end, this lowers the amount of money available to the economy, which aids in halting inflation.

In the event that inflationary pressures decline, the central bank adopts the opposing stance. The liquidity adjustment facility includes the repo and reverse repo rates.



Repo Rate: This is the interest rate that a nation’s central bank charges commercial banks for loans. The Reserve Bank of India (RBI), which is India’s central bank, employs the repo rate to control the economy’s liquidity. Repurchase option or repurchase agreements are similar terms in banking. When money is tight, commercial banks borrow money from the central bank, which is then reimbursed at the current repo rate. These short-term loans are made available by the central bank in exchange for securities like Treasury Bills or Government Bonds. The central bank employs this monetary strategy to reduce inflation or boost bank liquidity.

When it is necessary to limit borrowing and manage prices, the government raises the repo rate. On the other hand, the repo rate is lowered when additional capital is required to promote market expansion. A change in the repo rate eventually has an impact on public borrowings such home loans, EMIs, etc. Since it forces commercial banks to pay higher interest rates for the money that is borrowed to them. Numerous financial and investment instruments are indirectly reliant on the repo rate, from the interest commercial banks charge on loans to the returns on deposits.


Repo Rate in Reverse:

This is the fee a nation’s central bank charges its commercial banks to store their surplus funds there. In order to control the movement of money in the market, the central bank (in India, the RBI) also employs a monetary policy known as the reverse repo rate. In times of necessity, a nation’s central bank will borrow money from private banks and pay them interest at the current reverse repo rate. The RBI’s reverse repo rate is often less expensive than the repo rate at any particular time. Reverse repo rate is used to control cash flow in the market, whereas repo rate is used to control liquidity in the economy.

In order to encourage commercial banks to deposit money with the central bank and receive interest when there is inflation in the economy, the RBI raises the reverse repo rate. In consequence, this removes too much money from the market and lowers the amount of cash that is accessible for borrowing by the general people.


Repo & reverse repo rates at the moment

Repo rate

Reverse repo rate




The repo rate is a useful instrument for the banking regulator to control inflation in addition to assisting banks with lending availability. The RBI raises the repo rate in cases of rising inflation to deter banks from borrowing. As a result, the economy’s liquidity ultimately declines, which eventually controls the high inflation. A reversal technique is used when inflation starts to decline. In this scenario, the repo rate is lowered to encourage banks to take on more debt, which ultimately boosts the market’s supply and sparks new investment activity.

Here it is important to note that the credit thus given by the RBI to the banks is only offered for overnight use, and the banks purchase their securities that at a predetermined price were deposited with the banking regulator.


Repo and reverse repo rates differ from one another.

Repo rate

Reverse repo rate

The interest RBI charges, to lend credit.

The interest RBI pays on borrowings

Always higher than reverse repo rate.

Always lower than repo rate.

A tool to control inflation.

A tool to maintain cash flow.

Works as per repurchase agreement.

Works as per reverse repurchase agreement.

Transactions take place via bonds.

Transactions happen via bonds.


Key information on India’s repo rate

  • The RBI controls and sets the repo rate.
  • Repo rates are a method of reducing inflation.
  • Based on the repo rate, banks modify the interest rates on savings accounts and fixed deposits.
  • The reverse repo rate was the name of the repo rate before to October 2004.


Review of monetary policy: what is it?

Every two months, the six-member Monetary Policy Committee of the RBI, which is chaired by the governor. Meets to determine the bank’s monetary policy and adjusts key interest rates in accordance with the state of the economy. The monetary policy review also summarizes the nation’s current economic circumstances and details the current and upcoming steps the RBI intends to take to boost the economy.


How do changes in the repo rate affect home loans?

Banks pay less for borrowing when the RBI reduces the repo rate. It is hoped that banks would eventually pass this benefit on to their clients. The banking industry has reduced the repo rate by 200 basis points during the past 12 months. Which has helped to stabilize consumer demand as a result of the corona virus outbreak and its negative effects on the economy. To help consumers, banks have started decreasing the interest rates on home loans. The largest bank in the country, State Bank of India, has slashed the annual percentage rate (APR) on its repo rate-linked home loans to a record-low 6.95 percent.

In contrast, when the RBI adjusts its lending rate upward, home loan interest rates also increase. Interestingly, banks are quicker to pass on rate increases to customers than they are, on average, to lower their lending rates. Therefore, even though changes in the repo rate ought to be instantly reflected in the interest rates of financial institutions, only increases see fast transmission. And the RBI frequently needs to prod banks to pass on the advantages of lower rates to borrowers.


As a result of banks’ decision to tie the interest rates on home loans to the repo rate in October 2019. Future expectations may include faster transmission of policy. Prior to that, banks priced house loans using internal lending benchmarks such the prime lending rate, base rate, and marginal cost of funds based lending rate (MCLR).

The MCLR regime’s meager success dismayed the RBI, who commanded banks to switch to an external lending benchmark in 2018. This will make it possible for borrowers to gain more from changes in policy. After that, beginning in October 2019, banks shifted to the repo rate-linked lending system. The MCLR regime’s meager success dismayed the RBI, who commanded banks to switch to an external lending benchmark in 2018. This will make it possible for borrowers to gain more from changes in policy.


Key information on home loans with a repo rate

Buyers who take out a home loan with repo rates or those who move from their current home loans to it need to understand certain details about these loans.

Faster transmission: Any changes to the repo rate will probably be reflected in your EMI expenditure much more immediately. With repo-rate linked house loans, borrowers could expect a substantially faster transfer on to their loan rates. Additionally, the rate-setting process for such loans will be more open, which should provide borrowers more assurance when estimating their loan interest rates.

The amount of additional interest that banks will finally add to the repo rate on mortgages will also be decided. The cheapest house loan on the market right now is at 7 percent. Which is a three percentage point difference from the repo rate, which is now at 4 percent.






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