Impact of Increased Repo Rate on Economy

Impact of Increased Repo Rate on Economy

This is the first time in last 5 years, the Reserve Bank of India (RBI) on Wednesday hike repo rate by 25 bps in its Monetary Policy committee (MPC) meet, in its third bi-monthly statement, headed by the Governor Urjit Patel. The RBI increased the repurchase rate or repo rate from the existing 6.25% to 6.50%.

The main reasons behind the hike in the repo rates by RBI are the rising in the price of crude oil, slowing economic activity, and a rise in retail inflation. So, this hike in repo rate is an attempt by RBI to control the flow of money in the economy and inflation also. The increase in the repo rate is really a bad news those who have taken loans from bank, but before knowing the impact of repo rate on the loans and deposits, one has to know that what is a repo rate?


IMPACT OF THE HIGH REPO RATE

The increase in repo rate makes the borrowing expensive of banks, which likely to lead to an increase in the interest rates on loans which they offer to customers.

• ON LOANS :- With the hike in repo rate the fresh loan including home loan, personal loan and auto loan will get marginally costlier. The bank’s MCLR (Marginal Cost of Funds based Leading Rate) will go up as well as the interest rate of the loan also increases.

• ON FDs (Fixed Deposits) :- With increase in policy rates, the bank deposit rates are also expected to rise. SBI increase its deposit rates from 5 basis points to 10 basis points as the RBI increase the repo rate to 6.50%.

• Equity and Equity Mutual Fund :- if the repo rate increase, then it’s become more expensive for banks to get funds. If the loan would be more expensive for customer it’s not easy to pay the high EMIs of the loan amount. Repo rate and EMI are inversely proportional to each other, as the repo rate increases means that the customer has to pay a high EMI and vice versa.

• On debt funds :- The hike in repo rate is also not good news for the investors of Debt Mutual Funds. With increase in repo rate the price of the bond fall and brings down the Net Asset Value (NAV) of the Debt funds. So, it is good for investor to go for the short term Debt funds with shorter maturity periods.