Know the Difference Between Repo Rate vs Reverse Repo Rate and Choose the Best
The Reserve Bank of India prepares and directs monetary policies with the objective to manage the supply of money in India’s economy. The central objectives of introducing such policies are stimulating economic growth, enhancing the efficiency of financial administration, controlling market credit, and encouraging investments.
In this regard, repo rate and reverse repo rate are the two most influential instruments in RBI’s armor. To know the difference between these two, go through the explanation below.
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Difference between repo rate and reverse repo rate
The term ‘repo’ stands for repurchase agreement, and it is used by the Reserve Bank of India while lending money to commercial financial institutions when they have need funds. Here, commercial financial institutions sell government securities and bonds to RBI by agreeing to repurchase them in the future at a pre-fixed price, including interest payment.
Alternatively, the reverse repo rate is at which financial institutions operating in India deposits money with RBI to earn interest on it.
Hence, now that an individual knows what is repo rate and reverse repo rate, he/she can check out the difference between these rates and choose which one is feasible for them.
Major differences between repo rate vs. reverse repo rate
Check out the essential differences between these two rates:
- Considering the repo rate, RBI approves loans to commercial financial institutions by mortgaging government securities. Contrarily, the reverse repo rate is offered by RBI to financial institutions that deposit funds.
- Repo rate is comparatively higher than that of the reverse repo rate.
- Repo rate controls inflation while the reverse repo rate controls the money supply in India’s economy.
- The former manages a shortage of funds while the latter manages liquidity in this country’s economy.
- If the repo rate is higher, the cost of availing of funds for commercial financial institutions increases, thereby increasing the cost of financial products. Whereas excess liquidity in the system lowers this cost, which makes financial products affordable.
- This rate is charged on a repurchase agreement, and the current repo rate is 4.00%. The other one is charged on a reverse repurchase agreement, and the recent reverse repo rate is 3.35%.
After learning about the differences between repo and reverse repo rates, individuals need to know about their impact on interest rates when borrowing a personal loan or any other financial product.
How does a change in repo rate impact the interest rate charged on loans?
A reduction in repo rate affects the loan interest rate significantly. Since a reduction here makes it easy for financial institutions to borrow money from RBI, the interest rate on credit instruments reduces. Resultantly, the cost of availing of a loan also lowers. Hence, one can easily afford a loan.
However, it is essential for borrowers to note that a reduction in repo rate will decrease interest rates on personal loans only if the credit has been against floating interest rates. Moreover, if a personal loan is availed against a fixed interest rate, rates would not be impacted by the change in repo rate.
Therefore, it can be assumed new borrowers will be benefitted from these changes, while debtors who have chosen fixed rates will not get any advantage. It is one of the factors affecting personal loan interest rates, and individuals must carefully assess them before applying.
How does an alteration in repo rate affect personal loan EMIs?
Since a change in repo rate changes the cost of borrowing for lenders, they extend that benefit to customers as well. Therefore, with a reduction in this policy rate, one can get a loan with a lower interest rate and affordable EMIs.
Contrarily, an increase in the repo rate creates a contradictory scenario. By knowing these fluctuations and their effects, individuals can avail better interest rates on personal loans and lower their borrowing costs.
Apart from this, prospective borrowers must know the ways to get the best personal loan rate, which will allow borrowers to meet their financial requirements without any hassle.
Moreover, eligible borrowers can also avail of pre-approved offers extended by leading financial institutions on a wide range of financing options such as business loans, credit cards, personal loans, etc. These exclusive offers significantly reduce the loan processing time. Therefore, applicants can check their pre-approved offer by mentioning their name and contact information.
Now that borrowers have sufficient knowledge about repo rates and reverse repo rates, it will be easy to make a decision on which one to go for. Read also- Talent desire