Thread by @Finology_Quest

The RBI has hiked the repo rate by 40 bps up to 4.40% from 4% earlier! 🤯

But 1st let’s understand what Repo rate is? And what does it mean for investors, borrowers & customers?

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#RepoRate #RBIRateHike

Repo rate is a type of interest rate! 🏦💵

It is the rate at which the central bank of a country (Reserve Bank of India) lends money to commercial banks in the event of any shortfall of funds.

Repo rate is used by monetary authorities to control inflation.

What interest rates mean to different stakeholders :

• Borrower: It the price he pays for the use of money
(loan)

• Lender like banks: The "fee" earned for taking the
risk to extend loan

• Saver & investor: The return on investment from
savings a/c ,FD or bond

Why does RBI change the repo rate? 🤷‍♀️

Repo rate is a powerful medium which helps central bank in keeping inflation level, money supply and liquidity in check.

Additionally, the levels of repo have a direct impact on the bank’s cost of borrowing.

Why did RBI increase Repo? ⤵️

When there is a higher amount of money supply in the economy, it results in inflation.

To squeeze the excess liquidity from the market, repo is hiked.

Now people would get higher return on FD and would have to pay higher interest, if they borrow money from the bank.

And when RBI reduces repo, the bank follows the same which means you will get lower interest on your savings account and FD.

This encourages people to spend money rather than keeping the surplus in their account and this how it boosts consumption in the economy.

How does rate cut impact borrowers?

The same works in case of borrowers. When there is low demand in the country, RBI cuts repo and the lending rate becomes cheaper

This encourages people to borrow money for different requirements like buying houses, consumer goods etc.

How does hike in Repo impact equity investors?

Equity investments have an indirect impact of repo changes.

Companies also cut back on their spending on the expansion, causing dip in its growth & will affect profit and future cash flows. This may lead to a fall in stock prices.

As an investor you should not panic if your portfolio is in red. Don’t panic & continue with your regular investments. It’s time to curb speculative or aggressive investments.

And we also have a course which will help you to manage you personal finance: quest.finology.in/courses/person…