Repo rate cut-How it cuts the home loan interest rate?

The repo rate is a rate decided by the Central bank, which in India is popularly known as India’s Reserve bank. The Reserve Bank of India lends money to the banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. When the repo rate increases, the interest rates for fixed deposits increase while the lending rates also increase. On the other hand, if the reserve bank’s repo rate decreases, then the fixed deposit interest rates also lower, while the lending rates also decrease. The Repo rate is decided at the rate at which the commercial banks borrow money by selling their securities to the central bank of our country, i.e., the Reserve bank of India, to maintain the liquidity in case of shortage of funds due to some statutory measures. It is one of the primary tools being implemented by the RBI to keep inflation under control.

The repo rate is a monetary policy that can regulate the money supply, inflation levels & liquidity. The repo rate puts a direct rate impact on the cost of borrowing of the bank. The higher the repo rate higher will be the cost of borrowings for the banks and vice-versa. During the high inflation, the reserve bank keeps more control on the flow of money into the market. The higher interest rates being charged are a costly affair for businesses and industries, thus putting the slowdown on investments and money supply in the economy, thus keeping inflation in control. When the market is highly slack, the reserve bank’s repo rate is decreased, thus giving a boost to the economy & increasing the lending into the market. On the other side when the repo rate is cut, RBI infuses the funds into the system. Businesses and industries find it easy to borrow money in the economy. This ultimately boosts the growth rate of the economy. 

Following are the salient features of the repo rate set by the Reserve bank of India:

  • Helps in easing down the inflation:

When there is a shortage of funds in the market, and when the overall economy is slack, the reserve bank’s repo rate is being cut down to increase the liquidity into the market. The lowering of the repo rate gives rise in borrowing to the corporate companies and industries to expand their business and increase their presence in the market. As the corporate investment increases, there is a higher inflow into the market, thus giving a boost to the economy. When there is a positive sentiment in the economy, the general public’s purchasing capacity increases, thus providing a boost to the economy. The boost to the economy directly impacts the real estate industry; when there is a positive sentiment into the market, there is an increase in the properties’ sale. Simultaneously, there is a higher inflow of money into the market sale of all commodities increases into the market.

 

  • Helps in keeping the control of the flow of money into the economy:  

The RBI keeps strict control over the economy to maintain the flow of money into the market. When there is slack in the economy, the repo rate increases. If there is excessive inflation is found to be rising into the economy, the repo rate is being increased to restrict the excessive supply of money into the market. To keep the economy stable, the RBI keeps strict control over money flow into the market. As the sudden rise in demand for goods & commodities into the market can lead to hyper-inflation, the sudden decline of money flow into the market can lead to poverty & hunger. The real estate sector also shows similar signs as to when the market is slack, the real estate developers are left with huge unsold inventories. Simultaneously, if there is an excess inflow, the real estate prices increase with the sudden rise in demand. Thus the repo rate set by the RBI puts a very major impact on the sale of real estate into the market.

 

  • By reducing the repo rate- help provide a boost to the Real estate sector:

The repo rate cut reduces the lending rates for the loans. For a long time, there has been a continuous slide in the bank’s interest lending rates. The lending rates have drastically decreased from 10.50% to gradually sliding down to the 8.50% interest rates. Due to continuous ups & downs in the economy like the demonetization effect, the corona pandemic effect has led to the massive loss of the real estate market. At the same time, it is piled up with vast unsold inventories. The slide down in the interest rates has helped to easily access loans to the borrowers to buy their dream homes in an early stage of life. The higher intake of the loans provides a boost to the real estate sector and the leading financial institutions, which are the massive employment generators. As the investment in the real estate sector is very high, it gives a big turnout to the economy. When an individual purchases the property, there is a high amount of inflow into the economy due to the massive investment into an individual’s properties.

 

Conclusion

Thus the repo rate cut plays a significant role in the growth of the real estate sector. When the RBI cuts the repo rate, it gives easy access to the borrowers’ availability at lower interest rates. The repo rate cut increases the inflow of money into the economy as the lending increases by the individuals, companies & industries, thus leading to higher circulation of money into the economy.