RBI MPC Meeting Next Week- How The Repo Rate Changes Can Impact Your Finances

The RBI¡¯s next MPC (Monetary Policy Committee) meeting is scheduled to take place next week, from December 6th-8th 2021. Held on a bi-monthly basis, the announcements pertaining to this meeting are keenly looked forward to by everyone, given the multi dimensional impact the decisions can have on your finances. And amidst all this, one word around which a lot of buzz is created, is repo rate. Wondering what repo rate is and how it impacts your finances? Read on as we simplify this for you.

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What is repo rate?

Repo rate is the rate at which the RBI lends money to commercial banks, whenever the latter falls short of funds or needs liquidity. The banks borrow from the RBI against qualifying securities put as collateral, such as government bonds and treasury bills. Just like we borrow from banks at the applicable interest rates on loans, banks borrow from the RBI whenever required, at the repo rate.

How does the repo rate impact your finances?

As the repo rate is a key instrument used by the RBI to monitor increasing inflation and sustain market liquidity, the decision on repo rate during the MPC meeting is made based on the state of the economy. So, according to changing macroeconomic factors, the RBI keeps changing the repo rate, or may even keep it unchanged, which affects all segments of the economy, including loans and deposits of consumers.

- Impact on loans

W.e.f.1st October 2019, RBI had mandated banks to link most of the new floating rate loans to an external benchmark (amongst the ones proposed by RBI), which most banks have adopted in the form of repo rate. Hence, imperatively, any change in repo rate would likely impact your loan interest rates as well. While the new loans would be lent at new interest rates whenever made effective by banks, the existing borrowers¡¯ rates would change upon arrival on reset date only, which is directed by RBI to be done at least once in three months. So, any change in repo rate, up or down, is likely to reflect in your EMIs upon arrival of reset date. This also facilitates more transparent and smooth transmission of repo rate changes towards the borrower. Whereas for those serving existing loans on earlier benchmarks like MCLR, the transmission of repo rate changes is less smooth than external benchmarked loans like repo. This is because, the interest rates on MCLR-linked loans depend on the bank¡¯s cost of funds, which is an internal criterion that a retail borrower cannot guess or get to know about.

- Impact on deposits

The current scenario wherein loan rates are at all time low, along with the bank FD and savings rates being on the lower side, is quite evident of the relation between your finances and repo rate changes. Post the multiple repo rate cuts in initial months of 2020, which reduced repo rate to its lowest level of 4%, and the subsequent months till now wherein the repo rate has remained unchanged, loan and deposit rates have been witnessing a downfall. On the contrary, if the repo rate would have risen, loan rates would have climbed up as well, and banks tend to marginally increase bank FD rates too.

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