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Business News/ Markets / Explained: Why RBI's interest rate hike should matter to you
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Explained: Why RBI's interest rate hike should matter to you

The increase in borrowing rates caused by the RBI's hike in the repo rate will have a detrimental impact on consumers as EMIs and loans might become more expensive.

The Monetary Policy Committee (MPC) unanimously resolved on Friday, 5 August, to raise the repo rates by 50 basis points to 5.4 percent. (REUTERS)Premium
The Monetary Policy Committee (MPC) unanimously resolved on Friday, 5 August, to raise the repo rates by 50 basis points to 5.4 percent. (REUTERS)

The Monetary Policy Committee (MPC) unanimously resolved on Friday, 5 August, to raise the repo rates by 50 basis points to 5.4 percent with immediate effect. Due to this, existing home loan borrowers are likely to see a rise in their EMIs and lending rates.

The term "repo rate" refers to the rate at which commercial banks borrow funds from the Reserve Bank of India (RBI), the nation's central bank, in order to preserve liquidity. It is a crucial component of the nation's monetary policy and is used to manage liquidity, inflation, and the amount of money in circulation.

Furthermore, the levels of the repo rate directly affect how much money banks borrow. In other words, banks must pay the RBI more interest when the repo rate is higher in order to receive money, and vice versa when the repo rate is lower.

When the repo rate rises, the cost of borrowings for banks also increases, which is passed on to their account holders in the form of higher interest rates on loans and deposits. This increases the cost of borrowing money from the bank, which in turn slows down market investment and money supply. As a result, it restricts the availability of money and lowers consumer purchasing power, which aids in controlling inflation.

The RBI's move to raise interest rates might harm the real estate industry, which had witnessed a significant increase in sales thanks to affordable financing. The equivalent monthly instalments (EMIs) for current borrowers will increase when banks boost their interest rates, which will undermine the trust of future purchasers.

However, in contrast, fixed deposits become appealing in a rate increase situation since banks often raise interest rates on this type of investment vehicle. FDs are one of the oldest and safest types of investment in India since they provide a guaranteed return with no risk.

Why does RBI change repo rate?
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Why does RBI change repo rate?

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Published: 05 Aug 2022, 12:18 PM IST
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