The majority of what we do and what we get depends on the decisions made by the RBI as we try to survive this economy through savings and investments. The adjustment in Repo rates is one of the important decisions the RBI is making right now. It is one of the everyday jargons you would hear today. Let's attempt to comprehend how the average person is impacted by RBI's modifications to the repo rate and reverse repo rate. First, though, what is the repo rate?
Repo rates, according to the RBI, are "money market instruments that enable collateralized short-term borrowing and lending through sale/purchase transactions in debt securities." Repo rate, in other words, is the cost for banks to borrow money from the RBI. To combat inflation, a nation's central bank—in India, the RBI—raises the repo rate. Banks are discouraged from borrowing from the RBI when the repo rate is raised. The economy's decreased money supply aids in the management of inflation.
How does it affect a common man?
A little increase in the repo rate increases the cost of borrowing from commercial banks. The rate increase has an impact on a variety of loans, including those for cars, homes, education, personal or business loans, credit cards, and mortgages. The average person is deterred from making pointless purchases as borrowing costs rise, which lowers the demand for products and services. This starts a domino effect that lowers prices and, as a result, inflation. The repo rate serves as a stimulant in this simple game of supply and demand.
READ MORE: How does RBI's raising of interest rates impact your loan EMI?
When obtaining company financing becomes expensive, companies cut or stop employing, which results in unemployment. The auto sector is impacted by consumers' hesitation to purchase any luxury goods, including automobiles.
The move by the RBI to raise interest rates might have an effect on the real estate sector, which had seen a healthy uptick in sales since financing was so affordable. The trust of potential homebuyers would be undermined when banks' interest rates rise, pushing up equivalent monthly instalments (EMIs) for current borrowers.
The entire purchase cost for homebuyers would be affected by the increase in loan rates, which might also somewhat slow down residential sales. This increase warns prospective buyers that the historically low interest rate environment, which has been a significant factor in house sales nationwide since the epidemic started, is about to come to an end.
READ MORE: As interest rates rise, what should you choose: Higher EMIs or longer tenure with same EMI? 4 financial experts answer
The burden on the residential sector, which performed quite well in the previous quarter, will increase due to rising interest rates and inflationary tendencies in the main raw materials used in building, such as cement, steel, labour costs, etc.
On June 8th, the repo rate was increased by 50 basis points to 4.90 percent by the six-member Monetary Policy Committee (MPC), which is led by RBI Governor Shaktikanta Das. The RBI will resort to raising the repo rate once again in a few months if inflation persists in rising despite the recent modifications to it.