Understand RBI moves

Rate hike or cut,monetary policy measures impact householders budget. Read on to find how and plan your finances accordingly....

Why has the RBI increased interest rates?

The Reserve Bank of India RBI has a role to play in adjusting interest rates in the economy to keep a check on inflation. Inflation is the general increase in the level of prices in the economy.

As you might have observed,prices in general from vegetables to petrol have been on the rise in the recent months. So,in order to control inflation the RBI announced an increase in the repo and the reverse repo rates. This will help in reining in inflation by curbing demand.

What is the repo rate?

Sometimes banks need to borrow money from the RBI. The RBI charges these borrowing banks a rate of interest. This interest rate is called the repo rate. If this rate is high,then banks will be forced to pass on these higher rates to its own retail customers.

When the reverse happens,when RBI takes money from the banks,the rate at which this loan is given is called the reverse repo rate.

The repo rate has been increased from 5.50 per cent to 5.75 per cent,and the reverse repo rate from 4 per cent to 4.50 per cent.

Will my borrowing cost rise due to the rate hike?

Story continues below this ad

In the medium term,for instance 3 to 6 months,your borrowing costs are likely to go up for all kinds of loans such as home,auto and personal loans. This is because the rise in the repo rate will be passed on to the end customer. over a period of time.

However,some banks or lenders were running special schemes on teaser home rates whereby the rate of interest was fixed for the first two years and changes for the third year. If you have already availed of these schemes,then your rate will not change.

If you are applying for a fresh loan,you will have to apply for the loan before these teaser loan deals expire if you want these low rates. In any case,after these deals expire,banks are free to revise their rates.

How will the rate hike affect the base rate?

The base rate regime for interest rates came into affect on July 1. These base rates are internal benchmark rates that each bank must use to price its loan rates for loans offered to all clients.

Story continues below this ad

Now that the interest rates have increased,it is likely that the next time banks review their respective base rates they will increase their internal rate to reflect the rise in the repo rates. u