We always see the news that the repo rate has been increased or decreased by the Reserve Bank, but many people don’t know what the repo rate is and how it affects the economy. We are going to know complete information about the repo rate.
In the Reserve Bank of India, the repo rate and reverse repo rate are fixed by the Monetary Committee under the chairmanship of the Governor. These rates are used to measure liquidity in the economy. Repo rates are important to control inflation in the market.
What is Repo Rate?
The interest rate charged by the Reserve Bank on the loans given by the Reserve Bank to other banks is called the repo rate. Let us understand the exact meaning of the words repo rate and reverse repo rate when the monetary policy is reviewed by the Reserve Bank every two months.
What is Repo Rate
- What is the repo rate?
When we need money and our bank account is down, we borrow money from banks. Instead, we pay interest to the bank. Similarly, banks also need sufficient funds for their daily operations. For this, banks take loans from the Reserve Bank of India. The rate at which the bank pays interest on this loan to the Reserve Bank is called the repo rate.
Impact of repo rate on you
When the bank gets a loan from the Reserve Bank at a lower interest rate, the cost of raising funds will be reduced. Because of this, they can offer cheap loans to their customers. This means that if the repo rate comes down, the interest rates on your home, car, or personal loan may come down.
If the Reserve Bank increases the repo rate, the banks will have to spend more money on raising money and they will also lend to their customers at a higher rate of interest.
- What is the reverse repo rate?
When the banks operating in the country have money left over after the day-long business, they keep that money in the Reserve Bank of India. RBI pays them interest on this amount. The rate at which the Reserve Bank of India pays interest to banks on this amount is called the reverse repo rate.
Impact of reverse repo rate on you
When the availability of cash in the market increases, then there is a risk of inflation. RBI increases the reverse repo rate in this situation so that the bank deposits its money with it to earn more interest. In this way, less amount is left in the possession of the banks for distribution in the market.
- Cash Reserve Ratio (CRR)
Certain guidelines have been formulated for banks operating in India. These rules are made by Reserve Bank. Under banking regulations, every bank is required to keep a fixed portion of its total cash reserves with the Reserve Bank. This is called Cash Reserve Ratio or Cash Reserve Ratio (CRR).
RBI has made these rules so that a large number of customers in any bank cannot refuse to pay if they need to withdraw money.
What is the effect of CRR?
If the CRR increases then the banks will have to keep a large part of their capital with the Reserve Bank of India. After this, banks operating in the country will have less money to lend to customers.
Banks will have less money to lend to the common man and businessmen. If the Reserve Bank reduces the CRR then the liquidity in the market increases.
RBI changes the CRR only when there is no immediate impact on liquidity in the market. Changes in CRR affect liquidity in the market over a longer period than changes in repo rate and reverse repo rate.
Repo Rate
- What is SLR?
SLR is one of the important measures taken by the Reserve Bank to control the liquidity position of the economy. Statutory Liquidity Ratio Statutory liquidity ratio is the proportion of available deposits with banks, which they are required to keep with them before issuing loans against their deposits. SLR can be in any form like cash, gold reserves, or government securities.
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When banks secure this ratio, they are then allowed to issue loans against their deposits. Reserve Bank decides how much this ratio of SLR will be.
The maximum limit of SLR in India has been 40 percent. The Reserve Bank has the power to keep the SLR limit for banks at 40 percent and a minimum as low as zero percent.
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Impact of SLR –
The lending capacity of banks is controlled by SLR. If a bank gets stuck in a difficult situation, the Reserve Bank can compensate the customer’s money to some extent with the help of SLR.
What is Repo rate in Banking
Difference between Repo Rate and Reverse Repo rate
Both the repo rate and the reserve repo rate are determined by the Monetary Policy Committee (MPC) headed by the RBI governor. Here we have provided the difference between Repo Rate and Reverse Repo Rate, which candidates can check in the table given below.
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| Repo rate
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Reverse Repo rate
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| The rate at which RBI lends money to commercial banks is called the repo rate.
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The rate at which RBI borrows money from commercial banks is called the reverse repo rate.
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| It is always higher than the reverse repo rate
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It is less than the repo rate
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| It is used to control inflation and deficiency of funds.
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It is used to manage cash-flow
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| It is used to meet the deficiency of funds
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The reverse repo rate is used to manage liquidity in the economy
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| Current Repo Rate: 4.40%
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Current Reverse Repo Rate: 3.35%
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| Repo rate helps RBI to control inflation
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The reverse repo rate helps RBI to control the money supply
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FAQs: Repo Rate and Reverse Repo Rate
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