DNA Explainer: RBI keeps repo rate unchanged, know how it will affect you

The Reserve Bank of India (RBI) has kept the repo rate unchanged for the seventh time. RBI in its bi-monthly monetary policy review meeting on Friday decided to maintain the status quo on key policy rates such as the repo, reverse repo at 4% and 3.35% respectively. 

This is the seventh consecutive time the RBI has maintained the status quo on rates. With the repo rate remaining at the lowest level in the last two decades, it bodes well for borrowers but for savers, it is certainly not welcome news.

Then RBI decided to maintain an accommodative monetary policy stance to support growth, keep inflation at the targeted level. It had said the surge in COVID-19 infections has created uncertainty over economic recovery and asserted that the focus must be on containing the coronavirus spread. 

What is Repo Rate?

The Reserve Bank of India uses the repo rate to signal the monetary policy.

The Repo rate is an indicator of the rate at which commercial banks borrow money by selling their securities to the RBI in order to maintain liquidity.

Repo rate is basically one of the key tools of the Reserve Bank of India (RBI) to keep inflation under control.

What changed in repo rate means

Due to the unchanged repo rate, the interest rate can go upward.

RBI rate cut increases the demand for loans due to lower interest rates.

However, the cut in repo rate means a reduction in the cost of funds in banks.

Any rate cut means the cost of borrowing will be lesser for commercial banks.

Whenever the rate is lowered, the banks generally lower the lending rate.

This helps borrowers and enhances further lending and subsequent growth.

How RBI's decision will affect borrowers and FD investors

With repo rate unchanged, rates on home, auto loans linked to repo-rate are unlikely to increase soon unless the bank decides to increase or decrease its risk premium or margin on the loan.

Those planning to take fresh personal loans can lock in the present prevailing low rates as rising inflation can force the RBI to change its decision on key rates in the upcoming policy review meeting in August.

Those borrowers who have a home, car loans linked to BPLR, Base Rate, MCLR, may not see any change in their loan EMIs.

RBI had made it mandatory since October 1, 2019, for all floating rate retail loans from banks to be linked to an external benchmark like the repo rate.

As the RBI kept the repo rate unchanged, there may not be further reduction in FD rates across the tenures by banks.

But some banks may alter rates on FDs of specific tenure based on demand and supply.