Repo rate - housing loan rate relation (interest rate)

The recent market crash has left people high and dry. Banks have been facing liquidity crisis. Liquidity crisis is a phenomenon where banks or individuals do not have enough cash to honor their debt obligations. To counter this situation RBI has opted for Repo rate cut by 1% to induce and inject liquidity into the system.

Repo rate is the rate at which banks and financial institutions can borrow from RBI for short durations. The duration can vary between overnight borrowing to 1 week. The lower the repo rate, the cheaper is the fund availability to the banks. Reduction of repo rate allows banks to borrow cash from RBI at a lower rate to meet their obligations.

Whether this rate cut leads to reduction in housing loan rates or PLR remains to be seen. Usually, repo rate cuts translate into reduction of interest rates and housing loan rates. This is simply a result of cheaper availability of funds to banks. But since the repo rate ensures short duration funds to the banks whereas the loans are long term, banks need confidence measures from RBI that the repo rate will remian same for some time. This then allows banks to work out their short term borrowing against long term lending.