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REPO rate revision

08 Jun 2020


Repo Rate:

Repo Rate or repurchase rate is defined as the important financial policy rate of interest as in all over the central bank or the Reserve Bank of India gives short term cash to banks, that is actually to control credit  accessibility, economic growth & inflation. In India, Repo Rate is the key tool in the Reserve Bank of India's Monetary and Credit Policy. Policy rates that are very much alike, such as Reverse Repo Rate & Marginal Standing Facility Rate are generally straightforwardly connected with the Repo Rate of RBI.However, Reverse Repo Rate is completely opposite of the Repo Rate. Banks deposit cash with the Reserve Bank of India for shortened terms at general reverse repo rate.

Repo rate is a very meaningful & important rate for maximum people also. RBI sets everything from interest rates on loans to returns on deposits that affects the critical rates, that is the reason car loans, interest rates on homes & different types of borrowing are not fixed and managed by Repo Rate change. Likewise, banks regulate savings accounts, fixed deposit returns located on this basis.  


Meaning of  Repo Rate &  reverse Repo Rate:

Reserve Bank of India sets repo rate for allowing short term money to banks as mentioned above. Reverse repo rate is absolutely & completely different from Repo rate. The RBI borrows funds at this rate for the short term from the banks. Particularly, banks place their excess cash at this rate with the central bank, regularly for 1day. Interest rates are earned by banks on government securities purchased from the RBI for well-defined time.The Repo Rate is as usual more advanced than the Reverse Repo Rate,and the advancement between the 2 is RBI’s revenue.


Aside from Reverse Repo Rate, different kind of lending and borrowing under repo rate are as follows:

  1. Overnight Repo - It's a transaction or deal for a day is called an Overnight Repo. In this kind of agreement, banks sell securities for funds to the RBI, & redeem those the following day, in this way return the fund to the central bank.

  2. Term Repo - It involves time of more than 1 day. The common period of term repo or variable rate term repo is 7 days, 14 days & 28 days.The RBI declares the term repo auction usually when there is a requirement of money by the banks for a time period of more than a day. 


What is the current Repo Rate and who decides Repo Rate?

The RBI Governor governs the meeting of the Monetary Policy Committee. In that way the Repo Rate for the upcoming term or the present repo rate is settled.


How Repo Rate and Reverse Repo Rate are used to manage inflation and money supply:

  1. High rate rule - During the time of RBI carrying Repo Rate huge, banks turned to borrow small money from the central bank because of the huge amount of funds. Especially, the Reverse Repo Rate is likewise huge in team with the Repo Rate. This motivates banks to maintain additional funds with the RBI, because of huge income on it.

  2. Low rate rule - Again, during the time of RBI carrying Repo Rate less,banks can rent huge money from it at less amount.In the same way,the Reverse Repo Rate is still less in team with the Repo Rate.In this manner, the banks are having a preference to put small fund into the central bank,as it can carry less returns.   

  3. Use of Repo Rate as the important Monetary Policy tool - Monetary Policies of different central banks that are over the world can have various objectives as well.The essential aim of the RBI’s Monetary and Credit Policy in India is to manage inflation & to maintain it in a particular goal level .


How Repo Rate controls inflation and growth?

As it is mentioned above, high Repo Rate & Reverse Repo Rate allow limited funds available with banks to add, and with the order reversed. As we are aware that credit is the strength of a capital-led economy.  Limited availability of loans because of the huge amount of renting restrains money supply for the advance economic activity.It is managed once the inflation is huge by RBI’s goal standards, & also demand to control the increase in rates to observe the economy.Generally, it appears at the cost of few economic development.   

Secondly, as inflation is managed & under control, & economic development is taking a break too much, RBI can prefer to cut Repo Rate & Reverse Repo Rate. It is targeted for growing credit opportunity & lowering the cost of borrowing, and remains additional cash for entrepreneurs and businesses to give energy economic activity.


How does bank lending & borrowing from RBI work?

RBI give money to banks for low term normally that is against government securities.RBI also provides fund to banks if there is any requirement.For the most part, it is short time borrowing & lending process, while the RBI purchases bonds from commercial banks.The arrangement is for selling it back to them at a fixed date. Generally, the repo rate that is fixed by the RBI is 5% & fund that is rented by a commercial bank is Rs 100cr, therefore the interest paid to the central bank would be calculated at 5cr on an annualised base.


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