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What is Repo Rate and How Does Repo Rate Impact On Personal Loan?

  • Highlights

  • The repo rate is the rate at which banks borrow from the RBI

  • Changes in the repo rate affect the interest rate of loans

  • Knowing the repo rate meaning helps borrow effectively

  • Avail an attractive rate with a Bajaj Finserv Personal Loan

The personal loan has become a popular choice for borrowers looking to access collateral-free funds quickly. While the ease and convenience of application and disbursal is thanks to advancements in the fintech sphere, the Reserve Bank of India (RBI) has also played an important role to this effect. The periodic and systematic revisions made to the repo rate, for instance, have helped make the personal loan affordable and accessible. But, what is the repo rate and how does the repo rate impact personal loans?

Briefly put, the repo rate affects your loan interest rate. Any shift, be it in the form of a hike or a drop, will bring about change in this rate, but mainly at the discretion of your lender. As a borrower, knowing the repo rate meaning is simply the first of many essential bits of information you need to know in order to borrow efficiently. Armed with this information, you’ll be able to identify ideal opportunities when scouting for personal loans and know when to negotiate for better loan terms.

Here’s all you need to know about the repo rate and the repo rate impact on loan EMI.

What is Repo Rate?

The repo rate, or otherwise known as the repurchase rate, is a tool of the RBI’s Monetary and Credit policy. Is it the key rate, or interest rate, at which banks sell securities to the Reserve Bank of India in order to borrow money. This is done to maintain liquidity, thus ensuring control in credit availability. Here, banks provide the RBI with securities such as treasury bills to avail loans, with the agreement that these securities will be repurchased.

Further, other important policy rates such as the reverse repo rate are often linked to the repo rate, causing it to have a direct impact on the Indian economy. The RBI uses the repo rate mainly to control inflation and promote overall economic growth.

Must Read: Factors That Affect Your Loan Interest Rate

Who Decides the Repo Rate and What is the Current Repo Rate?

As it is a financial policy that affects the country as a whole, there is a special committee that convenes to decide the repo rate. The RBI governor alongside the Monetary Policy Committee (MPC) gather and collectively decide on the repo rate. As of the August 2020 Monetary Policy Committee meeting, the repo rate was maintained at 4.00%. This is an all-time low for the repo rate and is a good sign for those looking to borrow affordably.

What is Transmission?

Transmission refers to the manner in which key rate revisions made by the RBI are passed down to customers and reflect in offerings of financial institutions. This includes interest rate changes for various financial instruments such as personal loans, home loans and others. In the recent Financial Stability Report, RBI stated that transmission was improving in India. This is good news as it suggests that any further repo rate cuts will urge financial institutions to offer loans on more affordable terms.

Additional Read : The different types of loans available in India

What is High and Low Rate Regime?

Depending on how the repo rate shifts, there can be one of two rate regimes in effect. Knowing the regime can help you gain insights into the current economic condition and decide whether it is the right time to borrow. In a high rate regime, the RBI will have hiked the repo rate or maintained it at a high level. As such, banks are less likely to borrow from the central bank, which means that the cost of borrowing will go up. Alternatively, in a low rate regime, the repo rate will be low and this facilitates borrowing. As such, banks are less likely to invest on account of lower returns. This may be the best time to borrow as interest rates are likely to be lower.
Must Read: How to Avail Better Interest Rate for Your Personal Loan

How Does the Repo Rate Impact Personal Loan EMI?

In 2019, the RBI had instructed lenders to link all floating interest rate loans to an external benchmark, one of which was the repo rate. As such, lenders could choose to offer loans linked to the repo rate as a benchmark. As a borrower, this meant that every revision to the repo rate had a direct impact on your loan. If the rate dropped by 25 basis points, you could expect a proportionate drop in your lender’s rate. This also applies to rate hikes and would mean that you’d end up paying more interest if the rate increased drastically.

  • In 2019, RBI instructed banks to convert all floating rate retail loans, including personal loans, to an external benchmark.
  • RBI regulation aimed for repo rate was to ensure the effective transmission of repo rate benefits.
  • When banks or NBFC choose the repo rate as the benchmark they have to reset their interest rates for personal loans. This benefits both new borrowers and existing borrowers.

Now that you know what is repo rate and how it affects loans, the next step is to make smart decisions based on future projections for the repo rate. Meaning that you need to be thorough and consider everything that will affect your loan now and in the months to come. This can be instrumental in saving you money in the long run. To guarantee a favourable borrowing experience, pick the right lender. This means opting for one who offers affordable personal loan interest rates, useful loan perks, and a wide array of loan features. The Personal Loan is a good example of one that perfectly fits these criteria, offering you immense value.

Here, you can get approved for a sanction of up to Rs.25 lakh at a competitive and attractive interest rate with Bajaj Finserv Personal Loan. What’s more, this sanction is available to you for a flexible 12- to 60-month tenor, for maximum repayment convenience. With this loan, you also enjoy a convenient online application, expedited loan processing, and a 24-hour disbursal of the sanction. This makes it a smart and reliable option to go with, especially in the face of emergencies. It is also important to note that you benefit from a completely transparent borrowing experience, with no hidden charges whatsoever. To get started, simply check your pre-approved offer today and get instant approval through a customised deal!

The content of this document is meant merely for information purposes. The personal loan features mentioned in this article are subject to updation, completion, revision, verification and the same may change materially based on policy revisions. For more details, please visit our Personal Loan terms and conditions page here.

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