Understanding Repo Rate: Impact on Loans and Economy Explained

In its October 9, 2024 meeting, the RBI’s Monetary Policy Committee (MPC) decided to keep the repo rate steady at 6.50 percent for the tenth time in a row. This decision offers relief to home loan borrowers, but what exactly is the repo rate, and how does it affect home loan interest rates?

How the RBI Uses the Repo Rate to Regulate Lending?

The Reserve Bank of India (RBI) regulates the country's money supply and determines lending rates, which dictate the cost of borrowing for individuals and businesses. Along with managing currency circulation, the RBI plays a key role in setting the rates at which loans are issued.

The RBI doesn't lend money directly to the public but serves as a financial bridge for commercial banks. When banks face a funds shortage, they borrow from the RBI to maintain smooth access to loans for consumers. The interest rate at which the RBI lends to these banks is called the repo rate, which currently stands at 6.50 percent as of October 9, 2024.

How Does the Repo Rate Affect the Real Estate Market?

Changes in the repo rate affect all sectors, including real estate. Higher lending rates can deter buyers, as the cost of purchasing property increases with higher loan interest rates. Amid rising inflation, the repo rate was raised six times in FY 2022-23, totaling a 250 basis point hike. Starting in May 2022, the rate saw further increases in June, August, September, December 2022, and February 2023, as the government acted to curb inflation and maintain steady cash flow in the economy.

In the last ten Monetary Policy Committee (MPC) meetings, the RBI has kept the repo rate steady at 6.50 percent, unchanged since February 8, 2023. The meetings occurred on April 6, June 8, August 10, October 6, and December 8 for FY 2023-24, and on April 5, June 7, August 8, and October 9 for FY 2024-25.

The RBI's decision to maintain the repo rate is aimed at preserving stability, especially with the festive season approaching. By keeping rates steady, the RBI seeks to ensure consumers have the buying power to invest and spend, thereby supporting overall economic growth.

By LNN (Liyaans News Network)