Repo rate impacts your money

REPO RATE

Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. There is also something called reverse repo, which is where the bank lends money to the central bank. The repo rate is higher than reverse repo. These are one of the major tools of monetary policy. It is also an indication of the interest rate environment in the country. Repo rate also has a direct impact on your money. On August 1, RBI is set to come out with its bimonthly monetary policy review. The higher the repo rate, the tighter is the interest rate situation for you.

LOANS AND DEPOSITS

When the repo rate goes up, the interest on your home, car and personal loan rise.

And when it goes down, your loan rates are expected to go down. In case of status quo, your loan rates are likely to remain stable. However, this is not always the case. Other than policy rates, a bank’s cost of fund also impacts your loan rates.

Hence, if the bank finds it expensive to manage the loans, despite the repo rate remaining unchanged, there is a possibility that your loan rates will get impacted. The same condition applies to deposits.

WHAT YOU SHOULD DO?

You can never time the interest rate environment. However, looking at the monetary policy, you can get an indication based on the stance the banking regulator takes about the interest rate environment. You can get a sense of how the interest rate cycle will move. In a higher interest rate regime, you should opt for floating rate loans. In case of deposits, if you see the deposit rates are rising and want to invest in a fixed deposit, lock it in a higher interest rate, if possible. However, that doesn’t mean you should wait for the interest rate to go up by leaving the money in savings account.