What is Repo Rate in Detail

what is Repo Rate & Reverse Repo Rate In Detail

what is Repo Rate

The markdown rate at which a national bank repurchases government securities from the business banks, contingent upon the dimension of cash supply it chooses to keep up in the nation’s fiscal framework. To incidentally extend the cash supply, the national bank diminishes repo rates (with the goal that banks can swap their possessions of government securities for money). To get the cash supply it builds the repo rates. On the other hand, the national bank chooses an ideal dimension of cash supply and gives the market a chance to decide the proper repo rate. Repo is short for repossession.

what is Reverse Repo Rate

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

Description: An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.

Repo rate And Reverse Repo Rate

Reserve Bank of India defines the money related arrangements and executes them to accomplish a couple of explicit goals. Fiscal approach alludes to the strategies figured to control financial supply and rate of premium/cost of cash in the economy to animate the development. The essential target of such money-related strategies is advancing monetary advancement through value strength, the guideline of the volume of bank credits, improving the productivity of the budgetary framework, advancing ventures and diminishing the inflexibility to empower broadening and so forth. Repo rate and invert repo rate are the key instruments of the financial strategy of India that are utilized to control cash supply in the economy.

How does Repo Rate work?

When you borrow money from the bank, they charge interest on the principal. Basically, it is the cost of credit. Similarly, banks too can borrow money from RBI during cash crunch on which they must pay interest to the Central Bank. This interest rate is the repo rate.

Technically, Repo stands for ‘Repurchasing Option’. It is a contract in which banks provide eligible securities such as Treasury Bills to the RBI while availing overnight loans. An agreement to buy them back at a predetermined price will also be in place. So, this interest rate is levied on these kinds of repo transactions as well.

Current Repo Rate and its impact

RBI continues changing the repo rate and inverts repo rate as per changing macroeconomic elements. At whatever point RBI adjusts the rates, it impacts each part of the economy; though in various ways. A few portions gain because of the rate climb while others may endure misfortunes. Taking a gander at the developed of inflationary weights, RBI as of late climbed the repo rate by 25 premise focuses to 6.50% and the switch repo rate to 6.25%.

In certain occurrences, change in the switch repo rates can affect first-class advances like home credits. On the off chance that the RBI chops down this rate, it need not really imply that the home credit EMIs would get lesser. Indeed, even the loan fees may not descend fundamentally. The loaning bank additionally needs to diminish its ‘Base Lending’ rate for the EMIs to diminish. Home credit rates or fixed rate purchaser advances aren’t affected by RBI’s rate cut. The rate of intrigue is fixed regarding fixed credits.

Repo

Technically, repo (Repurchasing Option) is a contract in which banks give eligible securities such as Treasury Bills to the RBI while availing overnight loans with a commitment to buy them back. The interest rate charged on repo transactions is called the repo rate.

Following components are there under a repo transaction between the RBI and a commercial bank:

Bank gives eligible securities (securities identified by the RBI{like government bonds} and at the same time which are above the SLR limit).
RBI gives one day/overnight loan to the bank
RBI charges an interest rate called repo rate from the bank
Banks repay the loan after one day and repurchases the security it has given as collateral.
Reverse Repo

On the other hand, a reverse repo is an opposite contract under which banks can park their excess cash with the RBI by availing a rate of interest which is called reverse repo rate. Here, when the banks have excess money for the coming days, they can give it as a loan to the RBI. But here, the RBI will not give any securities (like Treasury Bills) to them.

Following are the components of the reverse repo transaction:

  • Bank parks its excess cash with the RBI for one day.
    Such money will be considered as a one day loan by the bank to the RBI.
    RBI gives an interest rate called reverse repo rate to the bank
    Of these two tools (repo rate and reverse repo rate), the repo rate is of prime importance because once repo rate is changed by the RBI, reverse repo also automatically changes by equal percentages in the same direction.

Repo and reverse repo facilities are available from Monday to Friday. Requests for repo and reverse repo can be submitted in the morning.

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