RBI Maintains the Status Quo on Repo Rate. Read to Know More!

The Coronavirus pandemic in India has affected the economic situation big time. As per the opinion of the World Bank and other rating agencies at the initial stage of the last financial year were concerned, India’s growth rate would show the lowest figures, since India’s Economic Liberalization, 1990.

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The monetary policy committee of the RBI reduced its key policy rates to sustain the financial system and control the economic fallout from the then-ongoing lockdown all over the nation. On 22nd May 2020, RBI reduced its repo rate from 4.4% to 4%.

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As our nation is moving forward to achieve normalcy after the Coronavirus pandemic induced economic turmoil, the banker of all banks has decided to maintain the rates that would continue through 2023 as well. Yet, on wide expectations, RBI on 5th February 2021, decided to keep the repo rate unchanged at 4% and reversed the repo rate at 3.35%.

• What is the repo rate?

When a bank lends money to any individual, it charges a rate of interest on the principal sum. This interest is the cost of the credit that the bank is rendering. Likewise, when a commercial bank faces a cash crunch it borrows money from the Reserve Bank, for which, the reserve bank charges a rate of interest, which is commonly known as repo rate.

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• How is the repo rate related to home loans?

When a commercial bank is borrowing money from the central bank and the central bank is charging interest against it, commercial banks are incurring a cost. Then when the commercial banks lend money to customers as a loan, it charges an interest that mostly compensates the interest paid to the central bank. Therefore, the repo rate and home loan interest are directly proportional to each other.

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But of late, as per the new regulation of RBI, a new home loan scheme is introduced – Repo Rate linked Home Loan. This scheme states that the home loan rate of interests is indicated by the repo rate, instead of the Minimum Cost to Lending Rate (MCLR).

The MCLR offers comparatively higher rates than the current scheme offer. The Home Loan rates will change along with the changes in the repo rate in direct proportion.

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• RBI Rates and the response of Housing Sector

RBI Governor Shaktikanta Das stated that when our economy is showing traits of improvement, the housing sector is playing a favorable part as one of the sectors of normalizing sectors. This sector has a positive trend of both demand and supply amidst the improving consumer sentiment.

According to him, the union budget 2021-22 has introduced various plans for a growth drive. The estimated upward trend in capital expenditure foreshows capacity creation and thereby boosting up the prospects of growth and constructing credibility around the quality of expenditure.

While giving an opinion on the policy move, most of the business houses of the housing sector like Dhruv Agarwal Group CEO, Makan.com, Housing.com, and Proptiger.com raised a happy voice regarding the status quo on the repo rate along with the accommodative stance that would help the coronavirus hit economy to stand back on its feet. They also praised the steps taken for liquidity enhancement. But in addition, they also said that a reduction in the repo rate would still have been good for the upliftment of the current demand, which suffered a downward slope recently.

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As RBI proceeded with expected moves, the retail inflation is leveled above the comfortable zone of RBI. The real estate developers in India have shown a quite calm gesture towards this. According to them, along with the rate cuts of the financial institutions, the encouragement of the home buyers to invest more in the property will be enhanced.

Kaushal Agarwal, the chairman of The Guardian Real Estate Advisory opined that the budget had very few announcements regarding real estate.

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The sector was hoping for a cut in repo rate that would increase the demands for real estate assets. These assets were severely affected due to the pandemic and subsequent lockdowns.

The banks have settled the home loan interest to a sub-7% annual interest level. Most public lenders including Punjab National Bank, Union Bank, Canara Bank, etc., are currently lending home loans at over 6% rate of interest.

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