Understanding the Impact of a Repo Rate Increase on Your Finances

The Reserve Bank of India (RBI) uses the repo rate to regulate the economy. This interest rate determines the cost at which commercial banks borrow money from the central bank. A change in the repo rate influences loan interest rates, equated monthly instalments (EMIs), and overall economic activity.

When the repo rate increases, borrowing becomes costlier, affecting both individuals and businesses. Loan repayments rise, impacting home loan borrowers significantly. This article will explore the repo rate, its current status in India, its effect on financial decisions, and how borrowers can manage loan repayments efficiently.

What is repo rate?

The repo rate is the interest rate at which the RBI lends money to commercial banks in exchange for government securities. This monetary policy tool helps control inflation, liquidity, and economic growth.

When banks need funds, they borrow from the RBI at the repo rate. The cost of borrowing affects the interest rates they charge on loans. A higher repo rate leads to increased lending rates, making loans expensive for consumers. On the other hand, a lower repo rate encourages borrowing and spending, promoting economic growth.

What is the current repo rate in India?

As of January 2025, the current repo rate in India is 6.50%. The rate has remained unchanged since February 2023.

Parameter	Current value
Current repo rate	6.50%
Reverse repo rate	3.35%
Last change date	February 8, 2023

The RBI reviews repo rates periodically to maintain economic stability. Any increase or decrease directly affects borrowers and investors.

How repo rates affect your finances?

A change in the repo rate impacts various aspects of personal finance, such as:

• Loan interest rates: A higher repo rate increases loan interest rates, making borrowing costlier.
• EMI payments: When repo rates rise, EMIs for home loans, auto loans, and personal loans become expensive.
• Fixed Deposit returns: A higher repo rate may lead to better returns on fixed deposits.
• Consumer Spending: Higher borrowing costs reduce disposable income, affecting purchasing decisions.
• Inflation control: An increased repo rate reduces liquidity in the market, helping control inflation.

What happens when repo rate increases?

When the repo rate increases, the following economic changes occur:

• Higher borrowing costs: Banks pay more to borrow from the RBI, which results in increased interest rates on loans.
• Expensive loans: Home loan, car loan, and business loan EMIs rise, making borrowing costly.
• Reduced investment and spending: Businesses and individuals limit borrowing, affecting economic activity.
• Stock market volatility: Higher interest rates can reduce investment in equities.
• Stronger currency value: Higher repo rates attract foreign investors, strengthening the rupee.

Read more: Know more about repo rate vs. reverse repo rate

Effects of reducing the repo rate

A lower repo rate has the following effects:

• Lower loan interest rates: Loans become more affordable, benefiting home buyers and businesses.
• Increased consumer spending: Cheaper loans encourage purchases, boosting economic activity.
• Higher inflation risk: Increased liquidity in the economy may lead to inflation.
• Boost in investment markets: Lower interest rates make stock market investments more attractive.
• Easier loan accessibility: Borrowers find it easier to secure home loans and top-up loans.

RBI repo rate cut history 2019-2023

The table below shows repo rate changes in recent years:

Year	Repo rate (%)	Change date
2019	6.25 - 5.15	Various
2020	4.00	March, May
2021	4.00	No change
2022	4.40 - 5.90	Various
2023	6.25 - 6.50	February

This trend reflects the RBI’s efforts to balance economic stability and growth.

Pros and cons of increasing repo rate

Pros	Cons
Helps control inflation	Increases loan costs
Stabilises the economy	Reduces disposable income
Encourages savings	Slows economic growth
Strengthens currency	Affects stock markets

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