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Repo & reverse repo rates
Repo & reverse repo rates. The Reserve Bank of India (RBI) on Tuesday lowered the benchmark repo rate by 50 basis points to 6.75 percent. This marks the fourth repo rate cut by the RBI since January 2015.
The Reserve Bank of India (RBI) on Tuesday lowered the benchmark repo rate by 50 basis points to 6.75 percent. This marks the fourth repo rate cut by the RBI since January 2015. The repo rate was last at 6.75 percent in March 2011. Consequently, the reverse repo rate under the liquid adjustment facility stands adjusted to 5.75 per cent.
The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. The repo rate in India is similar to the discount rate in the US.
When the repo rate increases, borrowing from RBI becomes more expensive. If 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. Higher the repo rate, more the banks are discouraged to borrow from RBI.
This leads to lesser disposal of credits to borrowers which ultimately has a check on the inflation rate. Reverse repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. The Reserve bank uses this tool when it feels there is too much money floating in the banking system.
An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it others (people, companies etc) which is always risky. It is also a tool which can be used by the RBI to drain excess money out of the banking system.
Repo rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Reverse repo rate is linked to repo rate with a difference of 1% between them.
