What Is Repo Rate?
Repo Rate, also known as repurchase rate, is the rate of interest at which the central bank that is the Reserve Bank of India (RBI) lends short term money to commercial banks, typically to control the inflation, fund short-fall, and the economic growth.
Repo rate is one of the most important parts of Indian monetary and credit policy by RBI. Repo rate is important for banks, as well as common people as the interest rates of various loans like a car loan, home loan, education loan, or personal loan, depending upon the repo rate.
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How Does Repo Rate Work?
When someone borrows money from the bank, they have to pay interest in the principal amount known as the cost of interest. Likewise, banks also borrow money from the Reserve Bank of India (RBI) during a cash short-fall on which they need to pay interest. This interest rate is known as the repo rate.
Repo stands for Repurchase Agreement, It is an agreement in which banks provide qualified securities like Treasury Bills to the RBI to avail overnight loans. There is also an agreement to repurchase the security at a predetermined price. Therefore, the bank gets the cash, and the central bank gets security.
How Does Repo Rate Helps The Economy?
The Repo rate helps the economy in many ways as the repo rate has a direct impact on the interest rate (cost of borrowing) for the banks.
The repo rate is being used to control the inflation of the country like during a period of higher inflation, the central bank tends to increase the repo rate to cut down the money supply in the market because the cost of borrowing will increase. This will slow down the lending, thus investment and money supply also reduce.
This procedure may have a negative impact on growth, but it helps to control the higher rate of inflation. In the same way by decreasing the repo rate the central bank also controls the lower inflation as well.
The repo rate helps to maintain the necessary liquidity in the market for the steady growth rate of the economy as the money supply is necessary for a higher growth rate of the economy.
When the economy suffering from a cash crunch, RBI needs to pump money into the economy by decreasing the repo rate, which reduces the cost of borrowing as a result of which businesses and people can take a loan at lower interest rates. This eventually boosts the growth rate of the country.
Repo Rate Vs Reverse Repo Rate
As you know, the repo rate is the rate at which banks borrow money from the central bank, whereas the reverse repo rate is the rate at which the central bank borrows money from the commercial banks. Generally, the reverse repo rate tends to have lower rate than the repo rate.
Repo rate is being used to control inflation and liquidity, but the reverse repo rate is used to manage cash flow without involving any security except for money.
What Is The Current Repo Rate In India?
The current Repo rate in India is 4.00%, with a cut of 40 basis points on May 22, 2020, by the Reserve Bank of India (RBI).
RBI persistently changes the repo rate and the reverse repo rate according to changing macroeconomic environment. The change in repo rate has impacts across various industries, some have a lower impact and some have a higher impact like banking and NBFC companies.
Repo rate is an important monetary policy, that has impacts across the economy and various industries, decided by Reserve Bank of India (RBI). The interest rate across the country depends upon this rate and even the stock market also heavily optimistic about the repo rate and changes in it.