What is Repo rate, CRR, Base Rate, SLR, and Reverse Repo Rate
Feb 08, 2019 Home Loan
The Reserve bank of India has outlined some monetary policies that factor the home loan interest rate which in turn affects the total EMI the borrower has to pay. All of this is responsible for calculating the total loan amount you pay to the bank for your property.
Many of us have a question regarding what factors are responsible for the liquidity of the financial component in the market, money circulation etc. as all of these are in some way or other have an impact over your mortgage loan. There are many terms that one might not understand.
We discuss all the terms here.
Many of us have a question regarding what factors are responsible for the liquidity of the financial component in the market, money circulation etc. as all of these are in some way or other have an impact over your mortgage loan. There are many terms that one might not understand.
We discuss all the terms here.
Repo rate
The rate at which RBI lends money to commercial banks against the government securities is called repo rate. When the RBI increases the repo rate, it becomes expensive for the banks to lend money from the RBI and hence the home loan interest rate increases. The same is true in case if the RBI slashes the repo rate. This results in the interest rate offered by the commercial banks to decline, making it easier for borrowers.
But the commercial banks do not generally rely on RBI for money; they usually have enough cash to fund themselves.
But the commercial banks do not generally rely on RBI for money; they usually have enough cash to fund themselves.
Reverse repo rate
It is the rate that the commercial banks charge on the funds they invest in the government securities with the RBI. If the reverse repo rate rises, then the home loan interest rate might increases as well since it is more profitable for the banks to invest the extra money on the low-risk government securities in India rather than giving it out to the home loan borrowers. When reverse repo rate falls, so does the home loan interest rates.
Base rate
It is the lowest interest rate that the bank charges its borrowers for a home loan. The base rate is not dependent on the RBI repo rate directly, but the repo rate does affect the base rate in some way or the other. The base rate is entirely in the hands of banks and it along with other margin rates; home loan interest rates are decided.
Cash reverse ratio
It is the percentage of bank deposit that a commercial bank needs to keep with the RBI. CRR is the instrument that the helps the RBI keep the liquidity under check. As of now, CRR is four which means whenever the bank deposit increases by Rs 100 then the banks will have to keep Rs 4 with the RBI. So when the CRR increases, the banks will have to save more money with the RBI which reduces the liquidity of money in the market.
Statutory Liquidity Ratio
It is the amount of funds that the banks are supposed to maintain with the RBI at any given point. The funds can be in the form of bonds, securities, etc. that is anything but cash. When SLR is high, then the banks have less money to lend out for loans hence the home loan interest raises.
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