How does the reverse repo rate work?

Repo rate and reverse repo rate are two essential instruments of RBI to keep inflation under control.

A reverse repo rate is a rate at which the financial institutions park credit with RBI to enjoy interest. Individuals willing to know about what is reverse repo rate is must know that the RBI increases in reverse repo rate to decrease the money supply and vice-versa, keeping other factors constant.

To understand what reverse repo is and how it works and impacts the Indian financial market, individuals can follow the illustrations below. 

How does the reverse repo rate work?

As already mentioned, a reverse repo refers to the rate that RBI offers to the financial institutions when they keep their surplus cash with RBI for a shorter period. In simpler terms, it is the rate at which RBI borrows finances from commercial financial institutions.

When financial institutions have excessive finances, they can increase the deposit with RBI. In this way, financial institutions can raise additional interest from their deposited funds.

While talking about what is reverse repo rate is, individuals must know that it has an inverse relationship with the supply of money. The RBI increases the reverse repo rate, encouraging commercial, financial institutions to keep more money with the RBI to earn greater returns on surplus cash, thus controlling inflation. 

Impact of repo rate on a personal loan 

Personal loans have become a popular option for borrowers willing to avail hassle-free unsecured loans. The systemic and periodic repo rate revisions have made personal loans more affordable and accessible. 

While knowing what is reverse repo and its effect on personal loans, borrowers must note that repo rate significantly affects loan interest rates. Any change in this rate impacts the lending rate. Therefore, the interest rates vary accordingly. 

For instance, when the repo rate is lower, lenders offer funds at affordable rates, ensuring lower borrowing costs and vice-versa. 

Regardless of the current repo or reverse repo rate, individuals can avail of competitive interest rates by comparing different lenders. 

This credit can be used to meet several professional and personal requirements. Individuals need to meet certain eligibility criteria and produce important documents required while applying for a personal loan. Borrowers can avail of instant personal loans from reputed financial institutions like Bajaj Finserv at competitive interest rates without any hidden charges.

Further, borrowers can also avail of exclusive pre-approved offers to ensure hassle-free loan applications and minimal documentation. These offers are available on a wide range of financial products such as personal loans, business loans, credit cards, etc. Individuals can check their pre-approved offer by submitting their essential credentials.

As a borrower, knowing the meaning of the repo rate and how it works are essential to ensure that you can make an informed borrowing decision. Suppose one knows all these crucial aspects of repo and reverse rate. In that case, it will allow them to identify suitable opportunities when searching for ways to get the best personal loan rate and know when to negotiate for better loan terms.

Apart from these, during 2019, the RBI had instructed all the leading financial lenders to link all the floating rates to an external benchmark, among which one was the repo rate. As a borrower, this fluctuation of repo or reverse rate will directly impact your loan. 

However, it is also essential to note that any repo rate reduction will reduce interest rates only if the loan is offered on floating interest rates. If borrowers have availed of a fixed interest rate, there will be no changes in the interest rate.

Therefore, if financial institutions introduce any changes in repo rate or reverse repo rate, new personal loan borrowers will benefit from this, while existing borrowers will not benefit from the same. 

With a significant reduction of interest rates, EMIs will be more affordable for borrowers. Alternatively, borrowers should also know the use of a personal loan calculator to estimate EMIs beforehand and ensure a hassle-free repayment procedure.

Now that borrowers know what reverse repo rate is, its function, and its impact on the financial market, one must make smart decisions about applying for this credit. 

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