What is repo rate?

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repo rate

Repo rate is a rate at which the Central bank i.e. the Reserve Bank of India (RBI) gives loan to commercial banks in an event of shortage of funds. The rate is subject to change as per the market situation and has a significant bearing on the buying capacity of a consumer.

Across nations, the government in power has the responsibility to regulate the money supply in the country. In India, the Reserve Bank of India (RBI) holds the authority and not only controls the supply of currency notes in the country but also decides the lending rate (cost of credit) i.e. the rate at which the money will be endorsed to the borrower. However, the apex bank does not lend capital to the masses and only acts as a financing institution for the commercial banks of the country.

In case of funds shortage, commercial banks may avail loan from the RBI to ensure smooth accessibility of funds to the consumers, . Here, the rate at which the RBI lends money to the commercial bank is referred to as ‘repo rate’. The current repo rate in India is 6.25 percent, however, it varies as per the market situations and significantly impacts the buying capacity of the buyer.

For instance, if the repo rate is higher, commercial banks reduce their borrowings from the RBI. This decreases the overall monetary supply in the economy, and thereby impacts the buying capacity of the consumer. On the contrary, if the repo rate falls, commercial bank borrowings spike up ensuring improved money circulation in the economy and increased spending capacity of the buyer.

How repo rate impacts real estate market?

A change in repo rate impacts all the sectors of the economy including real estate. As property purchase requires huge investment, high lending rates may dissuade buyers as overall cost of the property goes up.

Lately, the repo rate was hiked in June 2018. Considering the growing inflationary pressure, the repo rate was increased from 6 to 6.25 basis point. It was the first time in last one year that the repo rate saw an increment. The government has taken enough measures to control the repo rate and ensure healthy flow of funds.

In contrary to high repo rate, a lower cost of credit has a positive impact on the purchasing power of the end-consumer. Increased monetary supply implies more loans will be approved. This will put money back in to the buyers hand and will strengthen their buying decisions. 

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