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What is Repo Rate and Its Impact on Real Estate?

by Ashiana / / 3388 views/ Reading Time: 6 minutes

The term “Repo Rate” stands for “Repurchase Agreement or Repurchasing Option”. It is the interest rate at which the Reserve Bank of India (RBI) loans money to commercial banks including the public and private banks. In India, the banks obtain loans from the central bank, the Reserve Bank of India (RBI) by selling qualifying securities.

The central bank or RBI and the commercial bank would reach an agreement to repurchase the securities at a set price. When banks are short on funds or need to maintain liquidity under volatile market conditions, this is done.

Among the various economic factors that influence the real estate market, the repo rate stands out as a key determinant. The repo rate, set by the Reserve Bank of India, represents one such tool that plays an important role in shaping the property market dynamics. Let’s examine it more closely and understand what exactly is the repo rate, how it affects real estate, and why this should interest potential homebuyers, real estate investors, and developers.

What is Repo Rate and Its Impact on Real Estate?

What is the Repo Rate?


By definition, “Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) lends money to commercial banks or financial institutions in India against qualifying securities.” 

The central bank seeks to control the country’s liquidity, inflation, and stability by changing this rate. For example, once inflation occurs, the RBI raises the repo rate, making it expensive for banks to acquire borrowing funds. This reserved funds tapping ultimately affects customers with increased loan rates, especially housing loans.

The current Repo Rate in India has been set at 6.50% and remained unchanged as per the latest announcement by the government on 8th August 2024. This rate is subject to change depending on the economy’s state. In addition to the repo rate, there is the reverse repo rate, which comes into play when the RBI borrows funds from commercial banks to manage excess liquidity in the financial system.

Reserve Bank of India Repo Rate


These are the latest Repo Rate and Reverse Repo Rate as of October 2024 are as below – 

Repo Rate 6.50%
Reverse Repo Rate 3.35%
Bank Rate 50.15%
Marginal Standing Facility Rate 6.75%

Historical Repo Rates from 2020 to 2024


The repo rates by the Reserve Bank of India have been kept on a changing basis of the country’s financial needs. Following is the list of the historical Repo Rates in India for over the past 5 years –

Period – Date Effective from Repo Rates
8th August 2024 6.50%
7th June 2024 6.50%
8th February 2024 6.50%
8th December 2023 6.50%
8th June 2023 6.50%
8 February 2023 6.50%
7 December 2022 6.25%
30 September 2022 5.90%
05 August 2022 5.40%
08 June 2022 4.90%
May 2022 4.40%
09 October 2020 4.00%
06 August 2020 4.00%
22 May 2020 4.00%
27 March 2020 4.00%
06 February 2020 5.00%

(Source: Groww)

How does Repo Rate work?


The Repo Rate is the interest rate at which the RBI lends money to commercial banks, influencing the cost of borrowing. By raising or lowering the repo rate, the RBI controls inflation and liquidity in the economy, impacting consumer and business loans. This discourages borrowing, reduces money circulation, and helps curb inflation.

What is Repo Rate and Its Impact on Real Estate?

Calculation of Repo Rate by the Reserve Bank of India


The Repo Rate, set by the Reserve Bank of India (RBI), is the interest rate at which commercial banks borrow funds from the RBI. It is a key tool to control inflation and liquidity.

Factors Influencing Repo Rate:


  1. 1. Inflation: If inflation rises, RBI increases the repo rate to curb money supply; if inflation is low, the rate is lowered to boost growth.
  2. 2. Liquidity: The RBI adjusts the rate based on the liquidity needs in the economy.
  3. 3. Economic Growth: To stimulate growth, RBI lowers the rate; during rapid growth, it raises the rate to avoid inflation.
  4. 4. Global Factors: International interest rates, oil prices, and global economic conditions influence the repo rate.
  5. 5. Currency Stability: To manage the exchange rate and imported inflation, RBI adjusts the repo rate.

The rate is set by the Monetary Policy Committee (MPC), which reviews economic data and forecasts before making a decision.

What is Repo Rate and Its Impact on Real Estate?

The Impact of Repo Rate on Real Estate


Real estate is susceptible to changes in the repo rate. Here’s how:

According to analysts, home loan interest rates typically fluctuate in response to changes in the repo rate. Since banks borrow funds from the RBI at this rate, the increase in repo rate makes borrowing more expensive. As a result, higher home loan interest rates can discourage potential homebuyers, especially first-time buyers, reducing demand for residential properties.

However, when the RBI monetary policy reduces the repo rate, home loan interest rates tend to decrease. This makes loans cheaper to consumers, leading to an increase in the demand for real estate and creating incentives to invest in both residential and commercial properties.

Influence on Property Prices


The interest rate is one of the most critical factors determining the price of a property. With a high repo rate on real estate, only a handful of people can apply for loans from banks. Consequently, developers may struggle to sell their units, leading them to offer discounts or reduce prices. In contrast, a lower repo rate can increase demand, raising property prices in highly competitive markets.

Impact on Real Estate Developers


In the case of real estate developers, the RBI bank repo rate impacts the cost of borrowing through banks. An increase in repo rates raises the cost of raising construction finance, which could delay project completion or force developers to increase prices. On the other hand, when repo rates reach their bottom, developers can borrow more practically, making them opt to extend the scope of the projects while lowering prices. This helps to sustain the supply of affordable housing units in the marketplace.

Investor Confidence and Market Sentiment


The repo rate impacts the economy, influencing more than personal loan rates. The RBI’s changes in the repo rate offer key insights into inflation, purchasing power, and overall economic conditions. For instance, the Central Bank of India’s decision to keep the repo rate at 6.5% reflects its commitment to balancing inflation control with economic growth.

In real estate, developers closely monitor these changes, as they directly affect supply and demand. A stable repo rate allows developers to plan long-term projects confidently without fear of rising borrowing costs. The real estate market tends to thrive when inflation is managed, and both buyers and lenders benefit from greater affordability and financial stability.

Difference between Repo Rates and Reverse Repo Rates 


Reverse Repo Rate is the interest rate paid by the RBI when commercial banks deposit their excess funds with the central bank. It helps control the money supply in the economy by encouraging banks to park surplus funds with the RBI.

The key difference is that the repo rate is used for borrowing from the RBI, while the reverse repo rate is for depositing with the RBI. Repo rates are higher to curb inflation, while reverse repo rates are lower to manage excess liquidity.=

Aspect Repo Rate Reverse Repo Rate
Lender RBI (Reserve Bank of India) Commercial banks (Private & Public Banks)
Borrower Commercial banks (Private & Public Banks) RBI (Reserve Bank of India)
Objective Manage short-term fund shortages Control the money supply in the economy
Interest Rate Higher than reverse repo rate Lower than the repo rate
Interest Mechanism Through repurchase agreement Through reverse repurchase agreement
Function Banks borrow money from RBI by pledging securities Banks deposit excess funds with the RBI
Impact of Higher Rate Increases borrowing costs for banks, making loans costly Encourages banks to deposit more funds with RBI, reducing money supply
Impact of Lower Rate Reduces borrowing costs, leading to cheaper loans Encourages banks to lend more, increasing money supply

In summary, repo rates primarily address liquidity shortages and inflation, while reverse repo rates help control excess liquidity in the market.

What is Repo Rate and Its Impact on Real Estate?

Conclusion


The repo rate is pivotal in shaping the real estate market by directly influencing home loan interest rates, property prices, and developer financing. A high repo rate discourages borrowing, leading to reduced demand and potentially lower property prices, while a low repo rate stimulates demand by making loans more affordable. Real estate developers and investors closely monitor repo rate trends as they signal broader economic conditions such as inflation and purchasing power. Understanding how repo rate fluctuations affect real estate can help homebuyers, investors, and developers make informed decisions in a dynamic market.
Tags: real estate, ashiana housing,
Category: Real Estate, Investment,

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Q1. What is the current repo rate?

The current repo rate in India is 6.50%, as set by the Reserve Bank of India.

The current reverse repo rate in India is at 3.35%.

Yes, the repo rate directly impacts home loan interest rates. When the RBI raises the repo rate, borrowing costs for banks increase, leading to higher home loan rates for consumers, which can reduce housing demand. Conversely, a lower repo rate allows banks to offer cheaper home loans, making borrowing more affordable and potentially increasing demand for real estate.

A repo rate hike directly impacts loan EMIs by pushing up interest rates. This occurs because financial institutions, faced with higher borrowing costs from the RBI, pass on the burden to borrowers through increased loan interest rates.

About The Author

Ashiana, Ashiana Housing build homes. Homes surrounded by vast green spaces and fresh breeze. Homes cocooned in secured gated complexes. Homes where futures are forged and there are opportunities to grow. And Homes in environments brimming with healthy activity, trust and respect. At heart, we build communities with care.

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