What Is A Repo Rate? How Does This Affect Your Home Loan EMIs?
Repo Rate Affect Home Loan EMIs- The underlying workings of the repo rate, which affects your house loan EMI, are explained in this article.
February 8, 2024: On February 8, 2024, the Reserve Bank of India (RBI) maintained the 6.50% repo rate. The banking standard has kept its main policy rate unchanged for the sixth consecutive time. In FY23, the RBI raised the repo rate by a total of 250 basis points.
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How do changes in the repo rate affect homebuyers?
Homebuyers are informed that every time the RBI adjusts the repo rate, the lending rate would also adjust upward or decrease, impacting the cost of borrowing. It is crucial to understand the repo rate and how it affects your home loan liability because it has a big impact on your finances. To gain a better understanding of how your home loans operate, it is also imperative to understand how the reverse repo rate operates.
What is a repo rate?
It goes without saying that banks require money in order to lend. In addition to receiving deposits from the general public, they are also able to obtain loans from central banks. Financial organisations must pay interest on the money they borrow from the central bank, just as borrowers must pay a fixed amount of interest to obtain credit from banks. The repo rate is the name given to this interest. Repurchasing option, often known as repurchase agreement, is short for “repo.” As per the agreement, scheduled commercial banks give the RBI securities, like gold or treasury bills, in order to obtain overnight credit in the event of a liquidity shortage.
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Repo & reverse repo rates in 2024
| Repo rate | Reverse repo rate |
| 6.50% | 3.35% |
In addition to assisting banks in obtaining loans, the repo rate is a useful instrument utilised by the banking regulator to manage inflation. The RBI raises the repo rate when inflation is high in order to deter banks from borrowing. This gradually lowers the economy’s liquidity and controls the rising inflation. In the event of declining inflation, a different approach is implemented. In this case, banks borrow more credit as a result of the repo rate being lowered, increasing the market’s supply and stimulating new investment activity.
It should be noted that the banks can only use the credit that the RBI has extended to them overnight, and the banks will repurchase the assets that they have placed with the banking regulator at a predetermined price.
What is the reverse repo rate?
Banks charge the RBI a reverse repo rate in exchange for lending money to the banking regulator. The RBI also uses the reverse repo rate, which removes liquidity from the market, to maintain targeted levels of inflation. The banking regulator depletes surplus liquidity from the system by raising interest rates, which incentivizes banks to lend money to it. Thus, there is less credit available for banks to lend.
Repo rate difference versus reverse repo rate
| Repo rate | Reverse repo rate |
| Always higher than reverse repo rate. | Always lower than repo rate. |
| Transactions take place via bonds. | Transactions happen via bonds. |
| The interest RBI charges to lend credit. | The interest RBI pays on borrowings. |
| A tool to control inflation. | A tool to maintain cash flow. |
| Works as per repurchase agreement. | Works as per reverse repurchase agreement. |
Important information about India’s repo rate
- The RBI sets and oversees the repo rate.
- One technique for limiting inflation is the repo rate.
- Based on the repo rate, banks modify the returns on fixed deposits and savings accounts.
- The repo rate was referred to as the reverse repo rate prior to October 2004.
What is a monetary policy review?
Every two months, the RBI’s six-member Monetary Policy Committee, which is chaired by the RBI governor, convenes to determine the monetary policy and adjusts key interest rates in accordance with the state of the economy. The monetary policy review also provides an overview of the nation’s current economic situation and provides details on the current and upcoming measures that the RBI intends to take to assist the economy.
How does a change in repo rate affect home loans?
Bank borrowing costs decrease when the RBI lowers the repo rate. It is anticipated that banks would eventually transfer this benefit to their customers. On the other hand, when the RBI raises its lending rate, home loan interest rates rise.
It is worth noting that banks tend to decrease lending rates gradually, but they are quick to pass on rate increases to their clients. Therefore, even though changes in the repo rate should immediately affect the interest rates offered by financial institutions, only increases do so quickly, and the RBI frequently needs to prod banks to pass along the savings from lower rates to borrowers.
After entering into force in 2016, the MCLR served as an internal lending benchmark that gave banks the ability to “reset” the loan rate at predetermined intervals as stated in the loan agreement. While the banks immediately passed on the burden in the event of an increase, they did not pass on the rate decreases imposed by the banking regulation to their consumers as soon as anticipated. “In addition to the repo rates, banks must consider their cost of deposit, operating expenses, etc. when determining lending rates for MCLR-based loans. Therefore, it is always expected that policy rate changes will be transmitted more slowly through MCLR-based loans.
In order to give borrowers a better opportunity to profit from policy changes, the RBI instructed banks to move to an external lending benchmark in 2018, dissatisfied with the MCLR regime’s lack of performance. After that, starting in October 2019, banks transitioned to a lending system linked to repo rates. Nowadays, house loans that are based on the RBI’s repo rate are available from practically all of India’s major banks.
Facts about repo-rate-linked to home loans
When taking out a house loan with favourable repo rates or transferring an existing mortgage to one, buyers need to be fully informed on a few key points regarding these loans.
Transmission is faster: Your EMI outgo will probably reflect any changes in the repo rate considerably more quickly.
Borrowers should anticipate a significantly faster transmission on to their loan rates with repo-rate linked home loans. Additionally, these loans will have a more transparent rate-setting procedure, which should provide borrowers greater assurance when it comes to predicting their loan interest rates.
This implies that if and when the banking regulator adjusts its benchmark lending rate, your home loan interest rate will likewise rise. Consequently, during the rising interest rate environment, buyers may be adversely affected by loans linked to repo rates.
Furthermore, banks have the last say over how much extra interest they will apply to house loans above the repo rate. The lowest housing loan on the market is currently at 8.50%, which is two percentage points less than the repo rate, which is currently at 6.50%.
Repo rate changes since June 2000
| Rate (in %) /Date | 6.25 / 07-02-2019 | 7.50 / 16-06-2011 | 7.25 / 30-10-2006 | 12.25 / 28-06-2000 |
| 6.50/08-02-2024 | 6.50 / 01-08-2018 | 6.75 / 17-03-2011 | 7.00 / 25-07-2006 | 12.60 / 27-06-2000 |
| 6.50/06-10-2023 | 6.25 / 06-06-2018 | 6.50 / 25-01-2011 | 6.75 / 08-06-2006 | 13.05 / 23-06-2000 |
| 6.50/10-08-2023 | 6.00 / 02-08-2017 | 6.25 / 02-11-2010 | 6.50 / 24-01-2006 | 13.00 / 22-06-2000 |
| 6.50/08-06-2023 | 6.25 / 04-10-2016 | 6.00 / 16-09-2010 | 6.25 / 26-10-2005 | 13.50 / 21-06-2000 |
| 6.50/06-04-2023 | 6.50 / 05-04-2016 | 5.75 / 27-07-2010 | 6.00 / 31-03-2004 | 14.00 / 20-06-2000 |
| 6.50/08-02-2023 | 6.75 / 29-09-2015 | 5.50 / 02-07-2010 | 7.00 / 19-03-2003 | 13.50 / 19-06-2000 |
| 6.25/07-12-2022 | 7.25 / 02-06-2015 | 5.25 / 20-04-2010 | 7.10 / 07-03-2003 | 10.85 / 14-06-2000 |
| 5.90/30-09-2022 | 7.50 / 04-03-2015 | 5.00 / 19-03-2010 | 7.50 / 12-11-2002 | 9.55 / 13-06-2000 |
| 5.40/05-08-2022 | 7.75 / 15-01-2015 | 4.75 / 21-04-2009 | 8.00 / 28-03-2002 | 9.25 / 12-06-2000 |
| 4.90/08-06-2022 | 8.00 / 28-01-2014 | 5.00 / 04-03-2009 | 8.50 / 07-06-2001 | 9.05 / 09-06-2000 |
| 4.40 / 04-05-2022 | 7.75 / 29-10-2013 | 5.50 / 02-01-2009 | 8.75 / 30-04-2001 | 9.00 / 07-06-2000 |
| 4.00 / 22-05-2020 | 7.50 / 20-09-2013 | 6.50 / 08-12-2008 | 9.00 / 09-03-2001 | 9.05 / 05-06-2000 |
| 4.40 / 27-03-2020 | 7.25 / 03-05-2013 | 7.50 / 03-11-2008 | 10.00 / 06-11-2000 | |
| 5.15 / 06-02-2020 | 7.50 / 19-03-2013 | 8.00 / 20-10-2008 | 10.25 / 13-10-2000 | |
| 5.15 / 05-12-2019 | 7.75 / 29-01-2013 | 9.00 / 29-07-2008 | 13.50 / 06-09-2000 | |
| 5.15 / 04-10-2019 | 8.00 / 17-04-2012 | 8.50 / 24-06-2008 | 15.00 / 30-08-2000 | |
| 5.40 / 07-08-2019 | 8.50 / 25-10-2011 | 8.00 / 11-06-2008 | 16.00 / 09-08-2000 | |
| 5.75 / 06-06-2019 | 8.25 / 16-09-2011 | 7.75 / 30-03-2007 | 10.00 / 21-07-2000 | |
| 6.00 / 04-04-2019 | 8.00 / 26-07-2011 | 7.50 / 31-01-2007 | 9.00 / 13-07-2000 |
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