Repo Rate and Reverse Repo Rate
Repo rate is the rate of interest at which commercial banks borrow money from the central bank i.e. Reserve bank of India (RBI). The term 'REPO' refers to repurchase option or agreement. It is a monetary tool used by the RBI to allow commercial banks to borrow money, when in need, against collaterals such as government bonds and treasury bills.
If RBI increases the repo rate, it makes it difficult for banks to borrow from it, reducing the cash flows in the economy, arresting inflation.
Decreasing the repo rate, consequently increases cash flows in the economy as credit becomes cheaper and spurs spending in the economy. It is a way of addressing a slowdown. RBI holds quarterly meetings to declare the repo rate for the quarter.
Repo Rate is the most significant rate for the common man too. Everything from interest rates on loans to returns on deposits is influenced by this crucial rate set by the RBI, which is why interest rates on home loans, car loans and other kinds of borrowings go up and down based on the direction of Repo Rate change. Similarly, banks adjust savings account, fixed deposit returns based on this benchmark.
who decides Repo Rate?
RBI Governor presides over the meeting of the Monetary Policy Committee (MPC), wherein the Repo Rate for the following term or the current repo rate is decided.
Current Repo Rate?
The current repo rate in India is 4.00%. The monetary policy committee of the RBI that last met in December 2020 did not change the policy rate.
Reverse Repo Rate
Reverse Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term. If there is excessive liquidity in the banking system, RBI may decide to increase the reverse repo rate. When there is a hike in reverse repo rate, banks can earn higher interest on their excess funds deposited with the Reserve Bank of India.
Current Reverse Repo Rate?
The current reverse repo rate in India is 3.35%..The monetary policy committee of the RBI that last met in December 2020 maintained continuity in the reverse repo rate.
Difference between repo rate and reverse repo rate?
Under the Reverse Repo Rate, banks deposit excess funds with the RBI and earn interest for it. The opposite of Reverse Repo Rate is the Repo Rate, at which the banks borrow short-term money from the RBI.