On 17 April 2020, the central bank of India has reduced the reverse repo rate by 25 basis points to make the parking of cash less attractive to the commercial banks. The RBI has now set the reverse repo rate at 3.75% and has also announced that it might slash the rates further in the near future.
Earlier, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has recently reduced the repo rate by 75 basis points (bps) on 27 March 2020. The repo rate has been revised and decreased from 5.15% to 4.4%.
RBI had also decreased the reverse repo rate at the same time, and it stood at 4.0% before the latest cut. The marginal standing facility (MSF) rate has also been decreased which now stands at 4.65%. The current bank rate also stands at 4.65%.
What is Repo Rate?
Borrowers take loans from banks and financial organizations, who provide these loans after charging a certain amount of interest. Therefore, the rate at which the borrower takes the loan is known as the Cost of Credit.
In the very same manner, banks and financial organizations borrow money from the Reserve Bank of India by selling their surplus government securities. The rate at which they sell these securities to the RBI is known as the Repo Rate, also known as the Repurchase Rate.
A high Repo Rate will result in higher cost of short-term funds. Similarly, if the Repo Rate is low, it automatically brings down the amount of interest which banks will have to pay on the borrowed funds.
Therefore, if the Repo Rate is low, it allows banks to charge lower interest rates on the loans which they offer to their customers. Additionally, a lower Repo Rate can also contribute greatly towards generating a positive growth of the economy.
Impact of Current Repo Rate on Loan EMIs
The repo rate that decreased on 27 March 2020 will have an impact on both the existing and future borrowers. It generally takes a while after the repo rate is announced depending on the category of borrower you fall in, to know the impact of the changes. To begin with, the bank you are associated with might decrease the Marginal Cost-based Lending Rates (MCLR). The decrease in the Marginal Cost-based Lending Rate will cause the EMI on your loan to go down.
The change in the repo rate is likely to result in a decrease in the interest to be paid on a loan irrespective of whether it is a car loan, personal loan, or home loan rates. This is because the repo rate is the rate at which all the banks borrow money from the Reserve Bank of India. The reduction in these rates usually tends to have a direct impact on the interest to be paid by the customers.
Impact of the Latest Repo Rate on Existing Loan Borrowers
Existing loan borrowers will not see immediate changes in their EMI amount, even though many banks will change their MCLR in response to the rate cut by RBI. There is however, a possibility of a change in loan tenure. This will in turn reduce the effective cost of the loan as the number of EMIs to be paid will go down.
The long-term interest paid by a borrower to the bank will eventually go down as a result of a decrease in the interest rate that will have to be paid to the banks. This will in turn make the overall loan a little cheaper. If you do not want to make any immediate changes to your existing loan structure, you can always decide to wait and observe the impact that the repo rate cut will have on the loan. Depending on the impact, you can choose to make changes.
The long-term interest paid by a borrower to the bank will eventually go down as a result of a cut in the interest rate. This will in turn make the overall loan a little cheaper.
With RBI announcing a decrease in the repo rate on 27 March 2020, recent loan borrowers will mostly face a decrease in the amount of EMI to be paid depending on their loan tenure. Whatever the effect of a rate increase or decrease is, you will always have the option to transfer your loan to other banks after comparing the loan rates they offer and choose the most suitable offer.
