As we move further into 2023, the repo rate remains a critical factor in determining the cost of borrowing for individuals and businesses alike. The repo rate is the rate at which the central bank (in India, the Reserve Bank of India) lends money to commercial establishments such as banks. This rate has a direct impact on various financial instruments, including loans, credit cards, and savings accounts. Let’s take a closer look and find out everything you need to know about the Repo rate in 2023:
What is Repo Rate?
Before we dive into the impact of the repo rate on your EMI, let’s first understand what it is. The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks for short periods, usually overnight. The banks then use this money to lend to individuals and businesses. A repo rate is a tool used by the central bank to control inflation and manage the money supply in the economy.
The Impact of Repo Rate on Your EMI
Now that we have a basic understanding of the repo rate let’s explore how it impacts your EMI. Your EMI, or Equated Monthly Installment, is the amount you pay each month towards your loan. This amount comprises both the principal and interest components of your loan.
When the Reserve Bank of India (RBI) raises the repo rate, it becomes more expensive for banks to borrow money. In turn, banks increase their lending rates to maintain their profit margins. This means that if you have taken a home loan or any other loan, your EMI will increase. Similarly, if the Reserve Bank of India (RBI) lowers the repo rate, it becomes cheaper for banks to borrow money, and they may pass on the benefit to borrowers in the form of lower interest rates.
Let’s take an example to understand this better. Suppose you have taken a home loan of INR. 50 lakhs at an interest rate of 7% for a tenure of 20 years. Your EMI will be approximately INR. 40,280. Now, if the central bank raises the repo rate by 0.25%, your EMI will increase to INR. 40,702. This may not seem like a significant increase, but over the tenure of your loan, it adds up to a substantial amount.
However, it’s important to note that the impact of changes in the repo rate on home loan EMIs may not be immediate. Banks may take some time to adjust their lending rates after a change in the repo rate, so borrowers may not see an immediate reduction in their EMIs. Additionally, the extent to which borrowers can benefit from a reduction in the repo rate will depend on a variety of factors, including the size of their home loan, the duration of the loan, and their credit score.
The Impact of Repo Rate on Home Loan Tenure
Apart from affecting your EMI, the repo rate can also impact the tenure of your home loan. If the repo rate increases, your EMI increases, which means you may take longer to pay off your loan. This is because a higher EMI reduces the amount of money you can allocate towards other expenses or investments. On the other hand, when the Reserve Bank of India (RBI) decreases the repo rate, commercial banks tend to decrease their lending rates, including home loan rates. This means that borrowers will have to pay a lower interest rate on their home loan, which may decrease the overall cost of the loan. As a result, borrowers may either reduce their monthly payments or shorten their loan tenure to pay off their loan earlier.
It’s also worth noting that borrowers can take steps to reduce the cost of their home loans independent of changes in the repo rate. For example, borrowers can consider opting for a floating interest rate instead of a fixed interest rate. A floating interest rate can change over time based on market conditions, which can be beneficial if interest rates fall in the future. On the other hand, a fixed interest rate remains constant over the entire loan tenure, which can provide borrowers with stability and predictability in their monthly EMIs.
Another way borrowers can reduce the cost of their home loans is by making prepayments. Prepayments refer to making additional payments towards the principal amount of the loan, which can reduce the overall interest paid over the loan tenure. Some lenders may charge a prepayment penalty, so borrowers should check with their lenders before making any prepayments.
SLR Rate and Repo Rate
Another critical factor that impacts the cost of borrowing is the Statutory Liquidity Ratio (SLR) rate. The SLR rate is the percentage of a bank’s total deposits that it must maintain as a reserve in the form of cash, gold, or government securities. The SLR rate is set by the Reserve Bank of India (RBI) and is typically higher than the repo rate. Banks must maintain this reserve to ensure that they have enough funds to meet their obligations to their depositors.
Lastly, borrowers can shop around for the best home loan deals by comparing interest rates and fees charged by different lenders. It’s essential to consider the overall cost of the loan, including any processing fees, prepayment penalties, and other charges. Borrowers can also negotiate with their lenders for lower interest rates or waive off certain fees, especially if they have a good credit score and a stable income.
To sum it up, the repo rate has a significant impact on home loan EMIs, and borrowers should keep themselves updated on any changes in the rate. The repo rate affects the interest rates on home loans and the availability of credit in the economy. By considering floating interest rates, making prepayments, and shopping around for the best deals, you can save a significant amount of money over the loan tenure. It’s essential to stay informed about the market conditions and make informed decisions about home loans to minimize the financial burden of EMIs.