In India, loan rates aren't fixed. Banks and financial institutions (FIs) set their own "benchmark lending rates" based on the Reserve Bank of India's (RBI's) repo rate and reverse repo rate. These RBI rates act like a compass, steering loan rates up or down.
Repo Rate: The rate at which the RBI lends money to banks. Higher repo rate means costlier loans for banks, often leading to higher interest rates for borrowers.
Reverse Repo Rate: The rate at which the RBI borrows money from banks. A lower reverse repo rate discourages banks from parking funds with the RBI, potentially leading to lower loan interest rates.
The RBI adjusts these rates to influence the economy. For instance, increasing the repo rate aims to control inflation by making borrowing more expensive. Conversely, lowering the repo rate can stimulate economic growth by making borrowing cheaper.
Remember, the RBI considers other factors like inflation and economic growth when making its decisions.