The repo rate is the rate at which the RBI lends money to commercial banks in the event of a shortage of funds. When banks face a shortage of funds to meet their daily obligations, they can borrow money from the RBI by pledging government securities as collateral. The repo rate is the interest rate charged by the RBI on these borrowings.
How Does Repo Rate Affect Inflation?
The repo rate has a direct impact on inflation in the economy. When the repo rate is increased, borrowing becomes more expensive for banks, which reduces the amount of money in the economy. This, in turn, reduces the demand for goods and services, leading to a decrease in prices and inflation.
On the other hand, when the repo rate is lowered, borrowing becomes cheaper for banks, which increases the amount of money in the economy. This, in turn, increases the demand for goods and services, leading to an increase in prices and inflation.
The RBI sets the repo rate based on the prevailing economic conditions, including inflation, economic growth, and the global economic situation.
How Does Repo Rate Affect Home Loans?
The repo rate has a direct impact on home loans in the country. Most banks and financial institutions use the repo rate as a benchmark to determine the interest rate on home loans. When the repo rate increases, banks may increase the interest rate on home loans to maintain their profit margins. This, in turn, increases the EMI amount and the total cost of the loan for the borrower.
Conversely, when the repo rate decreases, banks may lower the interest rate on home loans, making it more affordable for borrowers to purchase a home. This can lead to an increase in demand for homes and, in turn, increase the prices of homes in the market.
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