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Everything a home buyer should know about the repo rate hike

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The RBI (Reserve Bank of India), like any other central bank, has the power to lend money to commercial banks. The rate at which this lending happens is known as the Repo rate. In its bi-monthly policy meeting in 2022, the RBI increased the Repo rate by 50 basis points (bps) to 5.40%. The Repo rate is leveraged by monetary authorities to keep inflation in control. 

What is a ‘repo rate’? 

As mentioned above, the repo rate is the rate at which the RBI loans money to banks. If the repo rate increases, it means it becomes more expensive for banks to borrow from the central bank because the cost of borrowing goes up. This will further trickle down to the end borrower, i.e., the common person who borrows from the bank. After the increase in repo rate, the commercial banks started to lend money at a higher cost, signalling that home loans or any other loans would now be more expensive owing to the increased interest rates. 

How Does Repo Rate work? 

A Repo rate is one of the most vital tools in a central bank’s kitty that it can leverage to exercise its authority and maintain a solid and sound financial system of the economy. This interest rate at which the central bank lends to commercial banks is set to manage sustainable and healthy liquidity in the financial system. 

In the event of a shortfall, commercial banks need money that they borrow from the RBI and pay it back as per the repo rate. The central bank increases the repo rate to restrict borrowings and control prices. On the contrary, if there is a need to infuse extra money into the financial system to support economic growth, they decrease the repo rate. 

Reverse Repo Rate Meaning

Just like the repo rate is the rate at which the RBI lends, the reverse repo rate is the interest rate offered by RBI to other banks to park their excess funds with the central bank. The Reverse repo rate, too, is regulated by the central bank to maintain the flow of money. The RBI borrows money as per their requirement from commercial banks and pays them interest. The repo rate controls liquidity in the market, and the reverse repo rate controls cash flow. The central bank increases the reverse repo rate to get commercial banks to deposit money in the central bank during inflation to earn returns. 

Repo Rate and Its Impact on Home Loans

Suppose you want to buy flats in Mumbai; the first thing that comes to your mind is a home loan. And what drives the home loan decision – the interest rate. The interest rate on a home loan is an essential factor that can affect a financial decision meaningfully. Buying a home is one of the most crucial financial decisions you make as it involves a large amount of money, the largest you will ever spend. The past few years have historically been a golden period for home loan borrowers owing to low interest rates. However, with inflation levels on the rise, the lockdown due to the Covid- and the geopolitical situation that arose due to the Russia-Ukraine conflict, the interest rates at which people borrow have gone up. 

Now with the increase in repo rate, commercial banks will have to pay the central bank more interest on the money they borrow from them, eventually impacting public borrowings like home loans. Everything from the return on fixed deposits to the interest charged on loans is indirectly dependent on the repo rate fixed. Therefore, a hike in the repo rate will make home loans pricier. Most of the existing home loans that have floating interest rates will witness a rise in the EMIs (Equated Monthly Instalments).   

How Does Repo Rate Impact home loan EMI

For example, you have an ongoing home loan of Rs. 50 lakh at 7% monthly interest for 20 years, if the rate increases by 0.4%, then the EMI will increase by Rs. 38,765 to Rs. 39,974. Then again, the rise in the rate of interest can be absorbed if you increase the tenure of the loan, as it ensures that the EMI remains the same. 

There are many flats in Mumbai for sale, but you need to pick one that suits your requirements and budget. With platforms like Blox.xyz, you can not only select your dream flat in Mumbai but also be abreast of all the financial implications associated with it. They digitize the end to end to home-buying process while taking care of the cumbersome paperwork involved. 

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Sanket Goyal is an SEO specialist at 1dofollow.com and is passionate about new technology and blogging.

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