Repo rate is the rate at which commercial banks borrow money from RBI against government securities. Whenever banks need urgent cash for a day, they sell government securities to RBI at a discounted price. To repay the borrowed funds, commercial banks re-purchase the government securities on the original price.
RBI uses the repo rate as a measure to control the flow of money in the economy. When it intends to decrease the cash flow in the economy, it increases the repo rate while to increase the flow of money in the economy; it reduces the repo rate.
As per the recent guidelines by RBI, it is now mandatory for banks to make repo rate the base rate for deciding the interest rate of real estate secured loans. Thus, the benchmark rate for home loan and loan against property is now RLLR (Repo-rate Linked Lending Rate).
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