The Reserve Bank of India in an announcement on 4th October, 2019, mentioned a cut in the Repo Rate. The MPC (Monetary Policy Committee) had announced a cut of 25 bps (basis points) in repo rates bringing it down from 5.40% to 5.15%. Along with the repo rate, the reverse repo rate has also been cut and stands at 4.90%. The MSF or Marginal Standing Facility rate stands at 4.9%.
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Repo rate is the rate of interest at which the banks and financial institutions borrow from the Reserve Bank of India. It also serves as the banker’s bank. Borrowing is against the sale of surplus securities with these banks, generally government securities. Repo rate is also known by another name, repurchase rate.
Repo rate has a direct impact on the interest rate customers pay while availing loans. Higher the repo rate, the higher is the cost of short-term funds and hence the customers pay a higher interest rate. Similarly, the lower the repo rate, the lower will be the cost of short term funds and hence the customers will pay a lower interest rate. When banks cut the repo rates; home loan, car loan and personal loan rates fall.
Repo rate cut has a major impact on the different classes of borrowers including the banks as well as individual borrowers. Although the impact is not immediate; a few things are assured after the announcement. These are:
Although the effects cannot be felt immediately, interest rates are revised on the reset date. This reduces the cost of loans.
This announcement effective 1st October 2019 sees an immediate effect on the overall lending system. This is a boon to the existing customers who enjoy lower rates on home and car loans. Banks also offer lower interest rates to the new borrowers.
The biggest and most awaited advantage of the system is that the long term loans get cheaper as a result of the repo rate cut.
RBI has asked the banks to map their systems against external benchmarks. In the case of loans where the banks are believed to enjoy higher profit margins, the Reserve Bank of India is more concerned on transferring the profits to individual customers as well. Banks used MCLR to map the loans which are an internal benchmark; but were questionable in terms of transparency. Now with the introduction of the repo rate as an external benchmark, the process is more transparent.
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