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What is the Reverse Repo Rate and Current Repo Rate?

The Reserve Bank of India retained its status quo in case of repurchase (repo) rate in Q3 FY20, keeping it the same as the previous announcement. Resultantly, the current repo rate and reserve repo rate now stand at 4% and 3.35% respectively. The decision has been made primarily to arrest the ongoing recession, and to boost the country’s growth at a macroeconomic level. However, this stance of keeping the repurchase rate unchanged is likely to influence home loan borrowers at a different level. 

Nevertheless, before anything, individuals need to gain a concrete idea about what reverse and current repo rate refer to.

What is the reverse repurchase rate?

The interest rate at which the RBI pays interest to commercial financial institutions while borrowing from them for a short term is known as reverse repurchase rate. In other words, when RBI plans to withdraw cash and liquidity as a means to control inflation, it offers lucrative interest rates to commercial financial institutions. It thus attracts financial institutions to park their credit with RBI to get better rates. 

Thus, this rate, coupled with repurchase rate, helps in stabilising the cash flow in the economy.

Significance of reserve repurchase rate

Like the current repo rate, this rate is also a crucial instrument to ensure balanced liquidity and cash circulation in the economy. When inflation remains under control, RBI sets a higher reserve repurchase rate, allowing financial institutions to earn interest for a short-term period by lending to the central bank. 

On the contrary during the cash shortage in the economy, RBI lowers this rate so that the financial institutions lower their lending rate for the prospective borrowers, making various loan products, including the likes of home loans, more affordable than before.

However, to better understand this economic metric, one needs to know the actual meaning of repurchase rate in detail. 

Repo rate meaning – A look

Repo rate refers to the interest rate at which commercial financial institutions borrow from RBI. This rate works precisely the opposite of that reserve repurchase rate. However, the aim of this monetary tool is alike, and serves in bringing stability in liquidity ratio and facilitates economic growth.

For instance, in case of an inflation-stricken economy, RBI cut its current repo rate so that financial institutions lower their lending rate. Eventually, borrowers whose home loans are linked to repurchase rate will get benefits of this rate cut. 

Nevertheless, they also need to know about MCLR based home loans to calculate the margin of their profit that stems from this RBI rate cut. 

Impact of current repo rate and reverse rate cut on borrowers 

The RBI announced several repurchase rate cuts in the recent past, which translated directly to the interest rates applicable to home loan borrowers on a large scale. Since financial institutions need to follow the guidelines of RBI, they have reduced their lending rate accordingly. It means that borrowers can now get a loan at lower rates, and the overall cost of borrowing is also likely to decrease accordingly. 

Moreover, select financial institutions also extend pre-approved offers to make the loan application process straightforward and less time-consuming. These offers are available on a range of loan products such as loans against property, home loans, etc. All you need to do is enter your name and mobile number to check your pre-approved loan offer instantly. 

Nevertheless, along with these rates, the GST applicability on home loans was also reduced. Thus, you also need to know how this GST rate cut brings the best time to plan your new home purchase. It will help you to suitably decide on applying for a home loan to leverage the benefits of rate cuts.

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