Repo means repurchasing options, which is an agreement wherein RBI provides overnight funds to financial institutions in exchange of eligible securities, such as treasury bonds.
RBI repo rate determines the interest rate at which financial institutions borrow money from the RBI. The organisation can increase the repo rate during deflation or encourage cash flow during inflation, whenever either of them becomes necessary.
How repo rates affect the economy?
Repo rate can be utilised to regulate cash flow, liquidity, and inflation. It also affects a financial institution’s cost of borrowing. Here’s how –
- Inflation
When inflation rises, the RBI increases the repo rate to slow down investments made by various financial lenders. This negatively impacts the market due to the high cost of borrowing from lenders.
- Cash flow
For a better cash flow, the RBI repo rate is decreased. This encourages financial institutions to offer loans at affordable rates of interests and encourages loan applications and sanctions.
Repo rate cut effect on home loans
With a repo rate cut, financial institutions can disburse home loans at a more affordable rate of interest. Low EMIs can make it easier for borrowers to repay the loan.
It is advisable that prospective homeowners, who want to invest in a home, to avail home loans during this period.
The announcement of repo rate cut can affect the economy in several ways among which, reduced lending rates or interest rates on mortgage loans is one of the many.
Must Read:- Consequences of a Repo Rate Cut
