How high repo rate impacts your finances, NBFCs

financialexpress.com:

Repo rate, also known as the repurchase rate, is the rate at which the central bank lends money to commercial banks. Repo rate is crucial in altering the economic landscape in the intricate network of financial systems. Fluctuations in this rate have far-reaching implications, altering the cost of credit and borrowing across the economy. Here’s how.

The repo rate is used to set interest rates throughout the economy. Borrowing becomes more expensive for commercial banks when the central bank raises the repo rate. As a result, these banks pass on the additional expenses to customers and businesses, resulting in higher loan interest rates. This occurrence has a domino effect on the entire financial environment.

Higher interest rates discourage borrowing by making loans more expensive for firms and people. This tightening of financing conditions can have serious consequences for economic growth, since enterprises may reduce their investments, stifling expansion and employment creation. Hence, credit accessibility becomes one of the direct repercussions of a high repo rate.

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Non-banking financial companies play an important role in providing financing to industries that regular banks may overlook. NBFCs often raise capital through a mix of loan and equity. When the repo rate is high, the cost of debt rises, reducing NBFC profit margins. Unlike traditional banks, NBFCs may not have access to the central bank’s low-cost financing, leaving them more exposed to market volatility. They are required to lend at higher interest rates in order to retain profitability, making loans more expensive for their consumers. This, in turn, exacerbates the