How does the Repo Rate impact interest rates on loans?

The Repo Rate set by the central bank has a direct impact on the interest rates on loans. When the central bank lowers the Repo Rate, it becomes cheaper for commercial banks to borrow money from the central bank. This reduction in borrowing costs encourages banks to lend more to individuals and businesses at lower interest rates.

Conversely, when the central bank raises the Repo Rate, borrowing costs for commercial banks increase. As a result, banks may pass on these higher costs to borrowers by raising the interest rates on loans, including home loans, car loans, personal loans, and other types of credit.

Therefore, changes in the Repo Rate can influence the overall cost of borrowing in the economy. Lower Repo Rates generally lead to lower interest rates on loans, making it more affordable for individuals and businesses to borrow money. Conversely, higher Repo Rates can result in higher borrowing costs and potentially deter borrowing and spending.