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Everything You Need To Know About Repo Rate and Reverse Repo Rate

What is reverse repo rate and repo rate? Are you aware of these important terms discussed so frequently in the world of the economy in India? 

A repo rate is a rate at which banks in India borrow funds from the Reserve Bank of India (RBI0. They do that by selling off their securities to the RBI. It happens when there is a shortage of funds or because of some statutory measures. 

It is one of the primary tools of the RBI to keep inflation under checks. Repo rate affects your loan interest rate and may lead you to pay lower or higher EMIs. 

How does the repo rate affect the economic system?

When you borrow an amount from a bank in the form of a loan, it attracts a rate of interest on the principal amount. It is called the credit cost. 

Just like it, banks also borrow money from the RBI to meet its liquidity requirements. They also do that in the event of paying the interest to it. In this case, the interest is nothing but the repo rate. 

The repo rate is a powerful aspect of the Indian economy. It helps to regulate the money supply of the company, inflation levels, and also liquidity. Also, the repo rate levels have a direct say on banks’ borrowing cost. 

Higher the repo rate, higher is the cost of borrowing for financial institutes and vice versa. A repo rate also affects your loan interest rate. 

When there is a high level of inflation, India’s Central Bank strives to bring down the cash flow in the economic system. 

One of the easiest ways to do that is to increase the repo rate. It leads to borrowing become an expensive affair for industries and more. 

In turn, it slows down investment and the supply of cash in the market. Hence, it negatively affects the economy’s growth. In turn, it leads to the controlling of inflation. 

What is reverse repo rate?

The mechanism of the reverse repo rate is also available in the Indian economy. It is a process to absorb the market’s liquidity. It restricts investor’s buying power. 

The reverse repo rate happens when the Central Bank of India borrows money from banks. It happens in the event of excess liquidity available in the market. 

Banks make the most of it by receiving interest for keeping their holdings with the RBI. 

During the high level of inflation in the system, RBI increases the reverse repo rate. 

In turn, it boosts banks to park a large amount with the RBI. It is done to earn a bigger ROI on the extra funds available. 

However, in the event of the reverse repo rate, banks are left with lesser funds to provide loans and other borrowings to customers. 

When there is a higher reverse repo rate in the market, loans may be offered by banks to customers at a higher rate. It is done to mitigate the risk of defaults of banks. 

What are the current repo rate and the reverse repo rate?

It is the RBI that keeps altering the repo rate and the reverse repo rate as per changing macroeconomic elements. 

Whenever RBI changes the repo rate and the reverse repo rate, there are impacts across the economy. 

The current repo rate in India stands at 4%, with the reverse repo rate being 3.5%. 

You are now aware of the basics of the reverse repo rate, repo rate and more. 




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