What is the Impact of the 5.4 % Repo Rate Increase on Economy ?
The RBI rate hike and its impacts of repo rate
One way to do this is by raising the repo rate(impacts of repo rate ). This makes taking on an expensive affair for businesses and industriousness, which in turn slows down investment and money force in the market. As a result, it negatively impacts the growth of the economy, which helps in controlling inflation.
A. Impact on the Banking System
Increase in Repo Rate
* Lending rates and deposits offered by banks are impacted by a rise or fall of repo rate. Still, it may not have an immediate effect. Banks may analyse their liquidity position and cost of funds before increasing the deposit rates and the lending rates.
* After analysis the cost of funds and liquidity position, banks may begin to pass on their interest rate burden to its end customer in the form of elevated lending rates. That means advanced equated yearly instalment for existing borrowers and advanced rate of credit for new borrowers.
* Home loans and other floating rate loans get majorly affected due to rate change. high lending rates may lead to a slowdown of the lending business for the banking sector, which will have an impact on their profitability.
* Post analysis of liquidity position, banks may also hike the rate of bank deposit offered to customers to attract more inflow of funds into the banking system.
Reduction in Repo Rate
* Banking is the first sector to get affected by any change in financial policies. It’s a big relief to banks when the Reserve Bank of India decides to reduce the repo rate. With the dip in repo rate, banks can borrow from the Reserve Bank of India at an affordable rate.
* With the availability of low cost credit, banks may indeed reduce the lending rates to its customers after analysing the liquidity condition and the deposit inflows. Banks may offer credit to its end customer at a reduced rate.
* As bank loans get affordable, consumers can spend and borrow more while spending a lot less in borrowing. Increased lending business will boost the profitability of the overall banking system.
* However, lending rate cuts and deposit rate hikes are purely dependent on the bank’s liquidity position and deposit demand from customers.
B. Impact on An Individual
Increase in Repo rate
* When the Reserve Bank of India decides to hike the repo rate; it becomes premium for commercial banks to borrow short term funds from the Reserve Bank of India. Increased repo rate discourages the bank from serving short- term loans and advances from RBI.
* Due to non availability of low cost funds, banks may hike the lending rate for its customers to pass on its high interest burden. That means the loan becomes premium for a common man. This may automatically reduce consumer buying power.
* On the other hand, banks may begin to offer fixed deposits at increased rates to attract more inflow of finances. It principally helps consumers to save more with increased rates on bank deposits.
Reduction in Repo rate
* When the Reserve Bank of India decides to reduce the repo rate, loans and advances come affordable for the corporate banks as they can avail short- term credit from the Reserve Bank of India at the reduced rate.
* Rate cuts may push banks to reduce their high lending rate. Reduction in high lending rate encourages more borrowers by making credit accessible at lower rates to the common man.
* With the increased chance to take on, consumers can spend more and mileage loans to achieve coming financial goals easily. One should understand the repo rates to manage their finances in a better way.
C. Impact on the Economy
Increase in Repo Rate
* When the Reserve Bank of India increases repo rates, it becomes a premium for banks to borrow. In other words, banks will have to pay more interest on their short- term borrowings from the Reserve Bank of India. a premium credit option for banks prompts them to hike the lending rate which they offer to their end customers.
* Expensive bank loans discourage the borrower from availing credit. This reduces the money fund in the demand and thereby stabilises the liquidity in the system. Consumption, Expansion and affair also take a downfall with the lower money fund. precious credit hinders profitable development and GDP growth indeed though affectation rate comes under control.
* Hence, the Reserve Bank of India revises the repo rate on a regular basis to keep the effectation rate under control and also to strike a balance between both economic growth and rising inflation.
Then are some of the vital impacts of increase in repo rate on economy
- Borrowing becomes premium for banks as they mileage short- term credit from the Reserve Bank of India at a fairly advanced rate. With the premium credit for banks, they will eventually loan the consumers at a kindly
increased rate. This may lead to premium bank loans for customers. As the lending gets expensive, borrowers get discouraged and demand for bank loans reduces.
- Reduced borrowing results in lower consumption demand which will lead to economic retardation that hinders the growth of GDP for the short term. As the consumption demand reduces, the profitability of every sector in the economic system takes a hit.
- Commercial loan buyers get discouraged to account credit with the hike in repo rate also discourages them. As the availability of business capital becomes costly, affair and expansion plans of corporations take a backstop.
- Increase in repo rate reduces the money budget in the economic system and thereby reduces the rate of affectation.
Reduction in Repo Rate
* When the Reserve Bank of India decides to cut the repo rate, the short- term loans for corporate banks come affordable. This prompts them to offer consumer loans at a fairly affordable rate. Many times, the base lending rate gets reduced with the reduction in repo rate.
* Base lending rate is the rate below which banks can not advance to its guests. Reduced base rate increases the consumption as people will have additional money at their disposal. Increased consumption appreciatively impacts the country’s Gross Domestic Product( GDP) growth.
* Affordable availability of credit encourages businesses to grow and expand. Prices of products get lower with the availability of low cost capital. New investments lead to better employment chances in the economy.
Then are some of the crucial impacts of repo rate cut on economy
- Consumption Demand Demand for auto, housing and every sector will rise due to availability of affordable bank loans to customers. Economic growth will take an upward trend with every sector growing due to increased consumption demand.
- Economic conditioning picks up. With the falling prices, the economy grows at a slower rate. Repo rate cut boosts economic conditioning and prompts healthy growth with acceptable supply of money in the demand.
- Boost to foreign investments Bank lending rates get reduced with the cut in repo rate. Lower borrowing rates will encourage the foreign players to invest in the Indian financial demand.
- It’s important to note that the repo rate cut isn’t the only financial measure for economic growth.
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