RBI Monetary Policy: How a 50 Basis Point Increase In The Repo Rate Will Affect You

The Reserve Bank of India, RBI has yet again revised the Repo Rate for the fourth time now. Repo rate refers to the power of the existing commercial banks in the country, both public and private to borrow short-term funds from RBI at a time of shortage of funds. The monetary policy committee of RBI has concluded to rise the rate by 50 basis points. The revised repo rate has been set at 5.9 percent. Moreover, the reverse repo rate has been set at 3.35 percent.

Experts claim that a higher rate of interest allows the reserve bank to restrain the country’s economic investment as well as money supply growth, which is essential for containing inflation. The pace of price growth for goods and services that are used and purchased is referred to as inflation. But on the other hand, a lower interest rate facilitates borrowing, and businesses commonly draw to spend money on new business initiatives, boosting the amount of money flowing into the market.

With more cash, more people will want more products and services, which will affect availability and drive up the price of consumer items. Even if raising the repo rate was predicted as a response to rising inflation, here are the effects for you.

Increased Deposit Rates Bring a Breath of Relief

A rise in interest rates on bank deposits is typically a good thing whenever the repo rate rises. Researchers think that consumers who have short- and medium-term investments, such as fixed deposits (FDs) and savings, will gain from higher rates since they will earn greater returns on their investments based on how banks carry on the anticipated interest rate increase.

Impact On Consumer Expenditures

People are discouraged from making large purchases when borrowing prices increase, which reduces the demand for goods and services. This messes up the supply and demand chains, say experts. With increasing bond yields and limited liquidity, lesser services and products will be bought, which will negatively influence demand. As a result, numerous services and goods would have seen a price increase and eventually fall out of reach for the less fortunate sections of society. The analysts do, however, contend that once inflation begins to stabilize in the medium to long term, the average person will profit from an increase in purchasing power.

Bank Loans Become More Expensive, and Existing Loan EMIs Increase

Whenever there is a monetary shortage, banking institutions take funds first from the central bank. The cost of bank borrowing money will increase due to the increase in the repo rate. This is because it gets more expensive for banks to draw short-term money from the reserve bank when the RBI raises its repo rate. To make up for the increase in the repo rate, the banks then increase the rates at which their clients borrow more money from them. This occurs as a result of banks’ lending to retail customers at interest rates that are inversely correlated with repo rates.

Purchasing A Home or Car Will Be More Difficult

The interest rate is typically the first factor taken into account whenever someone plans to take out a large loan, such as a home loan. A person agrees to borrow money at the market rate with the knowledge that they will be responsible for paying the debt back at the present rate while those who take out a house loan with a variable rate.

Commercial banks will modify home and auto debts as the RBI raise rates since they tie their retail loans, including business loans, personal, car, home, and, to the repo rate. With a rise in the repo rate, rates of interest will also rise. Therefore, with the rate increase, purchasing homes and cars will cost more.