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The interest rate at which loans are given by the Reserve Bank of India to financial sector institutions including commercial, public and private sector banks of the country is called repo rate. Reduction in the repo rate by RBI means to make the loan cheaper
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The Reserve Bank of India (RBI) is holding a meeting with the members of the Monetary Policy Committee (MPC) for a bi-monthly monetary review at the beginning of the new financial year 2022-23. According to economic experts, the repo rate and reverse repo rate are determined by the Reserve Bank of India during the bi-monthly monetary review. The increase in the repo rate adversely affects the stock market, economy and the common man.
The interest rate at which loans are given by the Reserve Bank of India to financial sector institutions including commercial, public and private sector banks of the country is called repo rate. Reduction in the repo rate by RBI is to make the loan cheaper. Home loans, car loans and other types of loans become cheaper when the repo rate is cut. Along with this, if the cost of credit remains low, then the demand for related products will also increase, which will lead to expansion of companies and new employment opportunities will also be created.
Hence, RBI's repo rate affects several sectors:
Loans
The repo rate set by the Reserve Bank is also the external benchmark, on the basis of which all the government and private banks of the country decide the interest rates of their loans. The loan linked to this rate is called Repo Linked Lending Rate (RLLR), in which banks fix interest rates for retail loans by adding some of their internal expenses. Apart from this, banks also disburse loans on the basis of their internal benchmark Marginal Cost of Lending Rate (MCLR).
Share Market
The change in the repo rate has a direct impact on the income of banks, their functioning, deposit credit and margins. Along with this, the effect of change in repo rate is also seen on the shares of banks trading on the stock exchange. Due to the reduction or increase in the repo rate, there is volatility in the bank shares. Along with this, the interest rates of auto and home loans also change due to cheap or expensive loans, which directly affects the shares of companies related to them.
Companies
Changes in the repo rate also affect the companies manufacturing, selling and supplying consumer goods in the country. Its direct impact is visible on almost all companies in the basic sector including automobile sector companies, real estate companies, NBFCs, cement, steel. About two hundred companies of the sector are associated with the real estate sector. The effect of change in repo rate is visible on all these companies.
Economy
As any change in the RBI's repo rate affects thousands of companies in the country. Apart from the banks, NBFCs, financial institutions, real estate, infrastructure sector of the country, all the sectors are directly connected with the economy. The effect of reduction or increase in the repo rate is also visible on the economy through thousands of companies and banks of the country.