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Repo Rate & Reverse Repo Rate P repared by Dharmesh B. chanchapara Roll No:-09. What is Repo Rate? Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money and how much they have on hand to lend.
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Repo Rate&Reverse Repo Rate Prepared by Dharmesh B. chanchaparaRoll No:-09
What is Repo Rate? • Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money and how much they have on hand to lend. • If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
What is Reverse Repo Rate? • The rate at which RBI borrows money from the banks is called as reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system. • If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI instead of lending it out.
What are the effects of RR & RRR • A very obvious effect of Repo Rate or Reverse Repo Rate is that, the banks would have lesser funds to lend to their customers. Which simply helps RBI to control the flow of excess money into the economy • Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.
Effect on inflation • If RBI decreases the repo rate it means commercial banks gets benefits, in other words it increases the money supply and so gives a rise to inflation. • If RBI decreases the reverse repo rate it means commercial banks would earn less amount of interest that will show a decrease in the inflation.
Till November, 2008 the Repo rate was 7.5% and the Reverse Repo Rate 6%. • On 6th December,2008 RBI has been cut the repo rate by 1% from 7.5% to 6.5%. • The reverse repo rate presently is 5% which has been reducted by 1% from the previous rate of 6%. • These are maintained by Reserve Bank of India to keep a strong control over the liquidity prevailing in the economy.
Conclusion • In short when commercial banks borrows money from RBI it means repo. • And when RBI borrows from the commercial banks it means reverse repo. • It is a very important function of RBI to control the market position.
