The Reserve Bank of India (RBI) is the central banking institution of India and one of its main functions is to regulate the country’s monetary policy.
One of the tools that the RBI uses to influence the economy is the repo rate, which is the rate at which commercial banks can borrow money from the central bank.
Whenever there is an announcement about the increase in the repo rate by the RBI, it causes concern among the general public as they are worried about how it will affect them personally.
Well, I explain the consequences of repo rate increase to a common man in today’s video.
A repo rate increase will essentially cause an increase in the MCLR rates by the banks as they will have to borrow from RBI at a higher interest rate.
Hence the EMIs for all kinds of loans that are based on MCLR will definitely increase.
When RBI increases Repo rate, the interest rates on outstanding credit call bills increase too. Basically in all the cases where we have to pay an interest to the bank, we can expect an increase in the interest rate.
On the positive side, the interest rates on investments like fixed deposit increase! So any kind of investment in banks that are fetching you interest will fetch you more interest when banks increase repo rate!
This comes as a plus to the common man, us!
The repo rate is the interest rate at which the central bank (such as the Federal Reserve in the US or the Reserve Bank of India in India) lends money to commercial banks. Typically, a central bank increases the repo rate in order to curb inflation and/or stabilize the currency.
When a central bank increases the repo rate, it makes borrowing money more expensive for commercial banks. This, in turn, can lead to higher interest rates for borrowers (such as consumers and businesses) as commercial banks pass on the higher cost of borrowing to them.
Higher interest rates can slow down economic growth by reducing consumer and business spending, and can also help control inflation by making it more expensive to borrow and spend money.
However, increasing the repo rate can also have negative effects on the economy. Higher interest rates can reduce investment and job creation, and can make it more difficult for individuals and businesses to borrow money. It can also increase the cost of government borrowing, which can lead to a larger budget deficit.