RBI Increases Repo Rate & Exactly How Will it Impact You?

The Reserve Bank of India's decision to increase the repo rate has been making headlines lately. And as expected by many, the RBI Hikes repo rate has been increased by 25 basis points to 6.50%.

In this article, we will discuss what happens if the RBI increases the repo rate and how the recent RBI interest rate hike in the repo rate by the RBI, makes an impact. 

Whether you are a borrower or a saver, it is essential to understand the implications of the rate hike and how it may affect your financial planning. So, let's look at the subject and understand what it means for you.

What is Repo Rate?

For those unfamiliar with the term, the repo rate refers to how much the RBI lends commercial banks at a given time. When the repo rate increases, it affects the borrowing and lending rates of the banks, and eventually, impacts the common man. 

Repo rate stands for "Repurchase Rate". It is the rate at which the central bank lends money to commercial banks in exchange for government securities.

When banks need money to maintain their reserves, they can borrow from the central bank at the repo rate. This helps banks meet their liquidity needs and manage their day-to-day operations.

A repo rate is an essential tool the central bank uses to control inflation and economic growth. If inflation is high, the central bank may increase the repo rate to discourage borrowing and spending, which can reduce demand and bring down prices. On the other hand, if the economy is sluggish, the central bank may lower the repo rate to encourage borrowing and spending, which can stimulate economic activity.

Changes in Repo Rate from 2019 to 2023: 

Repo Rate Impact on the Indian Economy:

What happens if the RBI increases the repo rate? An increase in repo rates can have a profound impact on India's economy, affecting inflation, investment, and overall economic growth. Let us see how RBI interest rate hike impacts the Indian economy:

Investment: 

A hike in the repo rate can lead to an increase in interest rates, making it costlier for individuals and businesses to borrow money. 

This can lead to a decrease in investment, which can slow down economic growth by decreasing demand and stalling job opportunities.

Consumption: 

If the repo rate rises, consumers cannot borrow for large purchases like homes, cars, or other durable goods, which can result in a decrease in consumer spending.

Economic growth can be halted by decreased consumption, which can also affect demand for goods and services.

Exchange Rate: 

The repo rate can also impact the exchange rate of the Indian rupee. A higher repo rate can attract foreign investors, leading to an increase in the demand for the rupee, which can strengthen its value against other currencies. 

A stronger rupee can make Indian exports more expensive, leading to a decrease in demand for Indian goods and services and impacting economic growth.

Mutual Funds: 

Mutual funds that invest in fixed-income securities such as bonds are particularly sensitive to changes in interest rates. When the repo rate increases, the yield on newly issued bonds increases, making existing bonds with lower yields less attractive to investors. 

This can lead to a decrease in the net asset value (NAV) of bond funds, as the value of their underlying investments decreases.

Impact on Existing Deposits: 

An increase in the repo rate may not immediately impact the interest rates on existing fixed deposits and other savings instruments. 

However, once these deposits mature, the interest rates offered on the renewed deposits may be higher or lower, depending on the prevailing interest rates at that time.

Impact on Inflation: 

The repo rate is primarily used by the RBI to control inflation. A hike in the repo rate can help control inflation by reducing liquidity in the market, which can help control price levels. This can help protect the value of savings by controlling inflation.

Impact on Existing Loans: 

An increase in the repo rate may not immediately impact the interest rates on existing loans. However, once the loan's reset date comes, the interest rate on the loan may be revised upwards based on the prevailing market conditions. 

Thus, borrowers may find it more difficult to repay their loans as a result of this increase in EMIs.

Borrowing Capacity: 

An increase in the repo rate can reduce the borrowing capacity of borrowers, as it can make loans more expensive. This can limit the amount of money borrowers can borrow and impact their financial decisions such as big-ticket purchases.

Why Should the Common Person Be Concerned About the Repo Rate Increase?

As a common person, you may wonder why you should be concerned when the RBI increases the repo rate. Any hike in the repo rate can have an impact on the economy as well as your finances in several ways such as:

Home Loans:

If you have a mortgage, a car loan, or any other type of loan that is tied to interest rates, an increase in the repo rate is likely to lead to higher borrowing costs. This means that you may have to pay more each month to service your debt, which can put a strain on your finances.

EMI Hikes: 

An increase in the cost of borrowing can lead to an increase in Equated Monthly Installments (EMIs) for individuals who have taken loans. This can make it more difficult for individuals to repay their loans and impact their financial stability.

Lower Spending Power: 

If interest rates rise, it can also lead to a decrease in consumer spending. People may have difficulty obtaining credit due to higher borrowing costs, which can limit their ability to make purchases or invest.

Beneficial For Savings And Fixed Deposit:

An increase in the repo rate can be beneficial for savings and fixed deposits because it tends to lead to higher interest rates on these types of accounts. The increased repo rate may enable you to earn a higher rate of interest on the money you have saved in a savings account or fixed deposit.

Final Thoughts

When the RBI increases the repo rate, it affects the economy and the country's financial stability. The RBI's primary objective is to maintain price stability and control inflation while ensuring sustainable economic growth.

RBI Repo rate hikes aim to regulate the money supply in the economy, control inflation and maintain the value of the currency. However, an increase in repo rates also affects borrowers, including individuals and businesses, as it makes borrowing more expensive. It is essential to closely monitor these changes in the repo rates and their impact on the economy. 

While repo rate hikes are not always popular, they are necessary to keep the economy on a steady course and ensure a stable financial future for the nation. The RBI's timely decision-making and measures have helped the country navigate through many economic challenges, and it will continue into the future.

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