Looking for a Home Loan? Know these Finance Terms Beforehand
Sep 10, 2018 Home Loan
Recently, Reserve Bank of India (RBI) has announced another hike of the Repo Rate during the third bi-monthly Monetary Policy Review (MPR) in August 2018 by increasing it to 6.5 per cent. Many banks and private lenders have already hiked the rate of marginal cost of fund-based rates. Any increase in the banks' fixed deposit rates will consequently increase the MCLR rate. Confused with all these jargons?
Here are some commonly used financial jargons.
Here are some commonly used financial jargons.
What is Repo Rate?
Repo rate is the rate at which central bank lends money to the commercial bank when there is a fund shortage. It is a tool to control inflation and liquidity by monetary authorities. RBI control its rate and often tend to slash rates when RBI needs more money in circulation. This encourages banks to borrow more money when required. Any increase in repo rate directly impacts bank products such as home loans and other mortgages and vice verse. Commercial banks that have adequate cash remain unchanged.
What is the Reverse Repo Rate?
Reverse repo rate is the rate at which banks charge on funds that they invest in the government securities with the RBI. This rate is fixed by the central bank to borrow money from banks. This is a significant monetary policy instrument where money supply can be controlled. RBI tends to offer good reverse repo rates for banks to make high profits at the times of need for liquidity in the economic system. Commercial banks prefer to invest in low-risk government securities than lending to people to invest in properties. So, any increase in the reverse repo rate would lead to a rise in the home loan interest rates and vice versa.
What is Cash Reserve Ratio?
Cash Reserve Ratio (CRR) is a minimum amount of deposit that commercial banks are required to hold as reserves with the central bank either in the form of cash or deposits. CRR is set according to the central bank guidelines to control liquidity in the system. Current CRR rate is 4 per cent.
What is Base Rate?
The base rate is the minimum rate that is set by the RBI below which banks cannot lend to its customers. This is to enhance transparency in the credit market and also ensure that banks pass on the lower cost of fund to the customers.
What is Statutory Liquidity Ratio?
Statutory liquidity ratio (SLR) term is used for the reserve requirement that the commercial banks are required to maintain. This could be in the form of cash, and the government approved securities or gold reserves before approving any credit to the customers.
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