top of page

Can a change in repo rates lead to a change in the prime lending rate offered by banks?

Curious about Repo Rate

Can a change in repo rates lead to a change in the prime lending rate offered by banks?

Yes, a change in repo rates can lead to a change in the prime lending rate offered by banks. The prime lending rate is the interest rate at which banks lend to their most creditworthy customers. It serves as a benchmark rate for various loans offered by banks, such as home loans, personal loans, and business loans.

When the central bank (which determines the repo rate) increases the repo rate, it aims to tighten monetary policy and control inflation. In response to an increase in the repo rate, banks may increase their prime lending rate. This is because the cost of borrowing funds from the central bank increases for banks, and they may pass on this increased cost to their customers by raising their lending rates.

Conversely, when the central bank decreases the repo rate to stimulate economic growth, banks may lower their prime lending rate. A lower repo rate reduces the cost of borrowing for banks, and they may pass on this benefit to borrowers by reducing their lending rates.

However, it's important to note that the relationship between repo rates and prime lending rates may not be onetoone. Banks consider various factors when determining their lending rates, including their cost of funds, operational expenses, credit risk, and competition in the market. Therefore, while changes in repo rates can influence the prime lending rate, it's not the sole determinant, and other factors also come into play.

bottom of page