What is Repo rate and CRR and how does it effect common people

POSTED BY Ashish Garg ON March 19, 2013 10:41 am COMMENTS (2)

Hi,

I was about to ask this question “What is Repo rate and CRR and how does it effect common people?” 

But then thought of finding on net about the same before I ask. Here is what I got and would like to share it with all:

http://blogs.reuters.com/india/2013/01/30/understanding-repo-rates-cash-reserve-ratios-and-the-reserve-bank-of-india/

If someone feels that there is more to be added to make common people understand the concept, please add on.

Thanks.

2 replies on this article “What is Repo rate and CRR and how does it effect common people”

  1. Ashish says:

    Dear Credexpert,

    Thanks for your inputs.

  2. Credexpert says:

    Dear Ashish,

    Repo rate is the rate at which bank borrows money from RBI and in today’s mid quarter monetary policy it has been reduced to 7.50 percent from 7.75 percent. This is directly related to common man in the following manner. Banks / lenders offer loans to individuals and earn interest on the same. Change in repo rate has a direct impact in the interest rates offered to customers for loans. Any increase or decrease could be passed to the common man.

    If an individual has a loan of Rs. 20 lacs at 12% interest per annum, 10 years tenure then the EMI would be approximately Rs. 28,694. If the interest rate is reduced by 0.25% to 11.75% the EMI reduces to Rs.28,405 and you would now save Rs.289 on per EMI, thereby saving Rs.34,680 across the entire tenure of the loan.

    CRR is the portion of deposits that banks mandatorily keep with the Reserve Bank of India. This generally does not earn any interest for banks. A cut in CRR will end up giving more money in hands of banks, which they can utilise to lend more. This idle money which is now been put to use by the banks will earn them interest and could prompt the lender to cut lending rates further.

    Regards,
    Credexpert

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