RBI's Historical Rate Adjustments During Crises

We have seen in the past that during a crisis, the RBI adjusts rates, considering various factors such as inflation, financial instability, and more.

In May 2020, when everything slowed down due to the lockdown, the RBI reduced the repo rate from 5.15% to 4.00% to ease borrowing and promote consumption.

Tarun has a home loan of ₹30 lakh at 9% interest. If the rate drops by just 1%, then Tarun will be able to save ₹1,500 every month on his EMI.

This is the power of the repo rate cut. It helps borrowers and stimulates the economy when it is needed most.

What Is Repo Rate And Why Is It Important?

Have you ever wondered who gives all the money to the banks? Well, it doesn’t come to them magically. RBI lends money to the banks. In return, it charges interest to the banks.

The repo rate is the interest rate at which it lends money to banks. In short,

• If the repo rate is high, then loans become costlier, and
• If the repo rate is low, loans get cheaper.

In a situation of inflation, the RBI increases the repo rate to decrease spending. In case of financial troubles or slowdowns, it decreases the repo rate to increase liquidity and spending.

• Repo rate ↑ = Spending and Liquidity ↓
• Repo rate ↓ = Spending and Liquidity ↑

Repo Rates During Different Crises

1991: India’s Economic Crisis And Emergency Measures

In 1991, the country's foreign reserves fell below $1 billion. It was barely enough to cover three weeks of imports. The economic condition was so serious that gold had to be mortgaged to foreign banks.

To avoid more damage, the RBI raised rates to handle the outflow of funds and stabilise the rupee.

The following are the repo rate hikes in 1991:

2008: Global Financial Crisis And Liquidity Push

2008, the global economy collapsed, and banks in many countries were failing. There were growing concerns about a possible liquidity shortage.

RBI started cutting rates aggressively to ensure money flowed into the system.

This move allowed businesses to borrow at low rates and customers to increase their spending. 

2013: Currency Crisis And Inflation Worries

Back in 2013, within just a few months, the rupee fell from nearly 54 to about 68 against the dollar. Also, inflation in necessary products was rising.

RBI acted quickly. It increased the repo rate several times to control inflation and restore stability to the currency markets.

2020: The Pandemic And Historic Lows

We all have faced the situation of COVID-19. Most of the factories shut down, we stayed in our homes, and demand in the market collapsed.

RBI took various measures like cutting rates of interest, providing liquidity support, and offering moratoriums. The central bank brought the repo rate down to its lowest level ever.

It helped banks in reducing interest rates and allowed people to get cheaper home, auto, and business loans.

2022: Post-COVID Inflation And Global Tensions

Post-COVID, when things started getting back to normal again, inflation started rising. RBI noticed this and started increasing prices to manage inflation.

Final Thoughts

RBI’s quick decision-making has played a huge role in stabilising the economy during difficult times. It used its rate tools to control inflation and support recovery.

From mortgaging gold to record-low rates, the journey of the RBI shows how important quick and balanced decisions are. 

Every decision of the RBI related to rate increase or decrease affects borrowers, savers, and the entire economy.

It might seem to you that the repo rate is technical, but its impact is very real. The more we will be able to understand these decisions, the better we will be able to plan our finances.

FAQs

1. What was the lowest repo rate ever set by RBI?

4.00% in May 2020.

2. Why did RBI increase rates in 2013?

To stop the rupee from falling and control inflation.

3. What was the average repo rate in the 1990s?

Around 10.75%.

4. How do repo rates affect ordinary people?

They influence loan EMIs and deposit interest rates.

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LoansJagat Team

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