Repo Rate and Reverse Repo rate

Repo Rate and Reverse Repo rate

What is Repo Rate:

Repo rate stands for repurchase rate and such rate is being used by central bank of any country to lend money for shorter period of time to other banks of same country.  This is effective rate of interest charged by central bank to other banks for loan given by central bank. It’s basically cost of credit obtained from central bank of any country.

Role of Repo rate in Economy:

Repo rate plays crucial role to maintain liquidity in economy.  Repo rate is one of the key factors which impact the liquidity in market. As repo rate is a cost component for borrowing bank and higher cost will always lead to reduction in borrowing capacity hence any increase in repo rate which reduce the borrowing power of banks which will further reduce liquidity in hands of borrowing bank.

Let’s understand, if Central bank of any country reduced the repo rate then it means other banks of such country will avail more loans as their borrowing cost has decreased due to reduction in repo rate. So if such banks took more loan then such banks will utilise this loan for further lending to retail and corporate customer which will increase liquidity in hand of customers. Such increased in liquidity will increase the expending power of customer which helps the inflation to grow further as excess liquidity increases the purchase power of customers.

It means increase in repo rate will decrease the purchase power of public which will result in decrease in inflation.

Any reduction in repo rate will increase the purchase power of pubic which will result in increase liquidity in market and increase in inflation.

What is current Repo Rate:

In India Reserve bank of India (RBI) is regulator of banking industry and have all controlling power to change repo rate.  Reserve bank of India (RBI) conducts review of monetary policy after every 2 months (bi-monthly) and decides repo rates.  If RBI thinks that there is no as such requirement to change the rate then rate announced in previous meetings will continues. In last 3-4 years, repo rate ranged between 5% to 7% per annum and as of now repo rate in 4% per annum.

What is Reverse Repo Rate:

Reverse repo rate is just opposite of repo rate means it’s a rate on which banks of a country lends money to the central bank of same country. In other words we can it is rate of interest on which reserve bank of India (RBI) borrows money from other Banks of India.

Role of Repo rate in Economy:

Its again plays key role in liquidity and inflation management mechanism in Economy. Whenever Reserve bank of India (RBI) thinks that there is excess liquidity in market then Reserve bank of India (RBI) increase reverse repo rate which allows banks in India to lend money to RBI and earn higher interest rate. Once banks lends money to RBI then such excess money went out from economy to RBI which leads reduction in Inflation

What is current Reverse Repo Rate:

As of now reverse repo rate stood at 3.75% per annum.

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