How Does Repo Rate Impact Personal Loan?

The Reserve Bank of India (RBI) closely monitors the country's economic conditions and decides the repo rate accordingly. However, do you know what this rate is and how it impacts Personal Loans? Essentially, the repo rate is the rate at which the Reserve Bank of India (RBI) extends loans to commercial lenders against their treasury bills. After bi-monthly meetings, the six-member Monetary Policy Committee (MPC) decides the current repo rate.

The repo rate has a direct impact on the lender loans’ interest rates. The following sections explain the repo rate increase effects for ordinary citizens.

What is the Repo Rate?

Just like borrowers pay interest to the lenders against the borrowed loan, banks pay interest to the RBI for their borrowings. Commercial banks can borrow funding from the RBI against eligible securities like treasury bills. It is a common procedure when a lender faces a financial crunch and requires liquidity to conduct its regular banking activities. 

The rate at which the lender borrows from the RBI is called the repo (Repurchase Option) rate. Banks purchase these securities at a pre-determined price in the future.

Factors Affecting the Repo Rate to Impact Personal Loan

The RBI keeps revising its repo rate at regular intervals. Since the repo rate directly impacts Personal Loans, it’s important to know what the current repo rate is in India. Here are a few factors affecting the repo rate:

1. Monetary Policy

Monetary policy is the policy the Indian monetary authority adopts to manipulate financial conditions and accomplish broader objectives like price stability and employment.

2. Inflation

Inflation refers to an increase in the prices of products and services in a country. Usually measured according to the consumer price index, the RBI increases the repo rate to curb inflation.

3. Economic Conditions

When the economy weakens, the RBI reduces the repo rate to increase cash flow. It becomes easier for consumers to borrow money and cover their expenses.

4. Global Factors

During times of global economic downturn, the inflation rates may increase due to poor demand and supply. These factors play a crucial role in determining the current repo rate.

5. Liquidity in the Financial System

In the case of excessive liquidity, the money supply increases, which leads to inflationary pressures. As a result, the RBI increases the repo rate, making loans expensive to borrow.

What Happens When Repo Rate Increases?

When the repo rate increases, lending institutions’ cost of borrowing becomes expensive. Since they pay a higher rate to borrow money from the RBI, they also increase their Personal Loan interest rates to compensate for their loss. For instance, the RBI increased the repo rate in 2023 (February) to 6.5%, making it costlier for borrowers to borrow, leading to suppressed cash flow in the economy.

Also Read: Reverse Repo Rate: Meaning And How It Works?

How Repo Rate Affects the Indian Economy?

With an increased repo rate, borrowers find it costlier to borrow loans from banks. Consequently, they postpone their expenses and avoid borrowing until the rates decrease. If they postpone their expenses, the economy faces a reduced cash flow. Therefore, the direct repo rate increase impact is the increased inflation rate. To curb inflation, the RBI decreases the repo rate to improve cash flow in the economy. Borrowers can enjoy the benefits of a repo rate cut by borrowing at a lower rate and covering expenses while saving money.

Does a Low Repo Rate Translate to a Smaller Personal Loan EMI?

• In 2019, the RBI instructed all banks to convert their floating-rate loans, including Personal Loans, to external benchmarks. 
• The RBI specifies the repo rate to ensure efficient transmission of the benefits. 
• Thus, lenders must use the repo rate as a benchmark to determine their Personal Loan interest rates. 
• Both new and existing borrowers can enjoy the benefits of a repo rate cut. For instance, if the RBI reduces the repo rate, lenders borrow funds at a lower interest rate. 
• Finally, they transfer some benefits to borrowers by offering them loans at lower interest rates. 
• Borrowers can use an EMI Calculator to check their EMI value and notice the difference when the repo rate decreases. 

Also Read: Current Repo Rate In India

Steps to Apply for a Personal Loan Online

Hero FinCorp is one of the best loan apps in India, offering Personal Loans at attractive interest rates. Follow these steps to apply for a Personal Loan online:

Step 1: Visit the Hero FinCorp website or download the personal loan app.

Step 2: Go to the Personal Loan page and click ‘Apply Now’.

Step 3: Enter your contact details and other required information.

Step 4: Scan and upload the necessary documents.

Step 5: Once approved, the loan amount gets transferred to your account.

Conclusion

When planning to borrow a loan, aspiring borrowers should stay updated about the current repo rate declared by the RBI. It directly affects the cost of borrowing, impacting people’s borrowing activities. Hero FinCorp has one of the best loan apps in India, offering loans at competitive interest rates. You can apply for one online to cover any financial expenses without hassle.

Frequently Asked Questions

1. What will happen if the repo rate is increased?

Reduced borrowing is one of the direct repo rate increase effects. When the repo rate increases, the loans become costlier, and people reduce their borrowing.

2. How does inflation affect personal finance?

When the inflation rate increases, the RBI increases the repo rate to reduce borrowing. This significantly affects people's finances.

3. How does the repo rate affect the common man?

Since the repo rate directly impacts the cost of borrowing, it also affects the common man by reducing or increasing their loan costs.

4. Will the repo rate decrease in 2024?

Intending to ease liquidity in 2024, the RBI may reduce its repo rate to make borrowing loans easier.

5. How the interest rate hike will affect you?

When the interest rate increases, you automatically borrow less. If you are an existing borrower with a floating-interest loan, the EMIs will increase and affect your finances. 

Disclaimer: The information contained herein is for general information purposes only and do not constitute professional advice. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any purchasing decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.