Repo Rate: Repurchase Agreement or Repurchasing Option is referred to as “repo”. The Reserve Bank of India (RBI) charges commercial banks a loan interest rate known as the repo rate.
Repo Rate
Repo is a money market instrument that enables secured short-term borrowing and lending by facilitating sales and purchases of debt instruments.
The current repo rate is 6.50% as on October,2023.
Banks offer acceptable securities to the RBI in order to acquire loans from the RBI. The commercial bank and the central bank, or RBI, would come to an arrangement to repurchase the securities at a predetermined cost. This is carried out when banks are short on cash or must maintain liquidity in the face of uncertain market conditions.
Current Repo Rate in India
The MPC agreed to raise the policy repo rate under the liquidity adjustment facility (LAF) on 28th February 2023 by 0.25%, so the current repo rate is 6.50%.
Earlier the repo rate was fixed at 6.25% on 7th December 2022.
The Reserve Bank of India (RBI) made the decision to maintain the repo rate’s stability on August 10, 2023, marking the last update.
How Does Repo Rate Work?
The Indian central bank uses the repo rate to regulate the movement of funds in the market. The RBI raises the repo rate when inflation hurts the market.
A higher repo rate indicates that banks will be required to pay higher interest when borrowing money from the central bank. This deters banks from borrowing money, which in turn lowers the amount of money available on the market and aids in reducing inflation. In a similar vein, repo rates are lowered during recessions.
Why is Repo Rate Important?
The Reserve Bank of India (RBI) uses the repo rate as one of its primary monetary tools. For the state of the nation’s economy, it is crucial. It serves a number of purposes, including:
1. Rising Inflation
When there is significant inflation, the RBI works hard to reduce money supply in the economy. Increasing the repo rate is one approach to accomplish this.
As a result, borrowing becomes expensive for enterprises and sectors, which in turn slows down investment and the availability of money on the market. As a result, it has a negative effect on the economy’s expansion, which aids in containing inflation.
2. Intensifying Market Liquidity
The repo rate is lowered by the RBI when they need to increase money supply in the economy. Therefore, borrowing money for various investment goals is less expensive for enterprises and industries.
Additionally, it expands the total amount of money available to the economy. In the end, this accelerates the economy’s growth rate.
3. Strengthening Currency
An exchange rate nation’s value can be affected by changes in the repo rate. Lower repo rates may result in a depreciating currency, which may encourage exports but raise import prices.
On the other hand, higher repo rates may result in a more valuable currency.
4. Affecting Interest Rates on loans & Financial Markets.
Repo rate have huge impacts on interest rates at which the bank gives out loans. Various loans as home loan, car loan or even personal loans are affected by this. When RBI decreases the repo rate, it becomes easier for banks to take money from RBI and hence there is decrease in interest rates, but if RBI increases REPO rate the interest rate also increases.
More on Loans:
The bond market can be affected by fluctuations in the repo rate because bond yields can fluctuate in response to shifts in interest rates. Comparably, when investors reevaluate their investment plans, stock markets might react to shifts in the repo rate.
Your mutual funds returns or savings interest is also affected by repo rates.
More on Financial markets:
Who decides the Repo Rate?
The Monetary Policy Committee (MPC) chooses the policy repo rate necessary to hit the desired inflation rate. The MPC must convene at least four times a year. Four members constitute a quorum for MPC meetings. The Governor has a second or casting vote in the event of a tie vote. Each MPC member has one vote.
How does RBI calculate Repo Rate?
The Reserve Bank’s surveys of consumer confidence, household inflation expectations, corporate sector performance, credit conditions, the prognosis for the industrial, services, and infrastructure sectors, and professional forecasters’ predictions are all examined by the MPC at its meetings.
The macroeconomic forecasts made by the staff are also thoroughly examined by the MPC, along with alternative scenarios that address various risks to the outlook.
The MPC adopts a resolution using the information above and following lengthy discussions on the direction of monetary policy. Following the conclusion of each MPC meeting, the Bank releases the decision made by the Committee. The MPC’s decision about the policy repo rate is included in the resolution.
What is Reverse Repo Rate?
The RBI borrows money from banks at a reverse repo rate when the market is overly liquid. The repurchasing arrangement that the RBI has pledged is called a reverse repo rate.
The Reverse Repo Rate is a mechanism for controlling investor borrowing capacity and absorbing market liquidity.
By depositing their surplus with the Reserve Bank of India rather than lending to their clients, commercial banks can earn more interest when the reverse repo rate is higher. Commercial Banks typically choose this option over client loans because it offers more interest income, is a safer alternative, and is supported by government securities.
Difference Between Repo Rate and Reverse Repo Rate
Parameter
|
Repo Rate
|
Reverse Rate
|
| Meaning |
A charge that is applied to the interest due when commercial banks borrow money from the RBI in return for securities at a certain interest rate and length of time. |
The interest rate that commercial banks receive when they deposit excess cash with the RBI. |
| Impact |
Commercial borrowers have a higher cost of funds due to a high repo rate, making loans more expensive. |
Lower liquidity in the economy is caused by a high reverse repo rate, and vice versa. |
| Agreement |
In accordance with the repurchase agreement. |
Recognized as an expense under the reverse repurchasing agreement. |
| Uses |
Assists the RBI keep inflation under control. |
Aids in the RBI’s effort to regulate the money supply in the economy. |
Read more on: Impact of repo rate on Indian economy
What is Bank Rate?
The interest rate at which the Reserve Bank of India (RBI) lends money to other commercial banks or financial institutions is known as the bank rate, sometimes known as the policy rate or discount rate.
A bank can ask the RBI, the central bank, for assistance when it needs money and can borrow money from them. Afterwards, the bank will pay the principal amount plus interest, which will depend on the current bank rate.
Read Full article on: Bank Rate Policy
What Is The Difference Between the Repo rate and the Bank Rate?
|
Parameter
|
Repo Rate
|
Bank Rate
|
| Meaning |
The repo rate applies to loans that the RBI makes available to commercial banks; these loans DO NOT lack security. The pledged securities serve as collateral for the loans. |
The bank rate applies to unsecured loans provided by the RBI to commercial banks (security for purpose of loans).
|
| Impact |
The buyback of securities is possible using the repo rate. Securities may be repurchased by the holder at a later time. Repo rate is also known as the repurchase rate as a result. |
There is no facility for the buyback of securities under the bank rate. The Rate of Discount is the same as the bank rate. |
| Uses |
The repo rate is related to the commercial banks’ short-term borrowings. |
The bank rate is related to borrowings made by commercial banks to address their current liquidity shortage (short-term). |
Reserve Bank of India (RBI) Repo Rate
RBI Repo Rate History from 2002 to 2023:
| Date |
Repo Rate |
|
6-10-2023
|
6.50%
|
|
10-08-2023
|
6.50%
|
|
8-06-2023
|
6.50%
|
| 8-02-2023 |
6.50% |
| 7-12-2022 |
6.25% |
| 30-09-2022 |
5.90% |
| 5-08-2022 |
5.40% |
| 8-06-2022 |
4.90% |
| 4-05-2022 |
4.40% |
| 8-04-2022 |
4.00% |
| 10-02-2022 |
4.00% |
| 8-12-2021 |
4.00% |
| 9-10-2021 |
4.00% |
| 6-08-2021 |
4.00% |
| 4-06-2021 |
4.00% |
| 7-04-2021 |
4.00% |
| 5-02-2021 |
4.00% |
| 4-12-2020 |
4.00% |
| 9-10-2020 |
4.00% |
| 6-08-2020 |
4.00% |
| 22-05-2020 |
4.00% |
| 27-03-2020 |
4.40% |
| 6-02-2020 |
5.15% |
| 5-12-2019 |
5.15% |
| 4-10-2019 |
5.15% |
| 7-08-2019 |
5.40% |
| 6-06-2019 |
5.75% |
| 4-04-2019 |
6% |
| 7-02-2019 |
6.25% |
| 1-08-2018 |
6.50% |
| 6-06-2018 |
6.25% |
| 1-08-2018 |
6.50% |
| 6-06-2018 |
6.25% |
| 7-02-2018 |
6% |
| 2-08-2017 |
6% |
| 4-10-2016 |
6.25% |
| 5-04-2016 |
6.50% |
| 29-05-2015 |
6.75% |
| 2-06-2015 |
7.25% |
| 4-03-2015 |
7.50% |
| 15-01-2015 |
7.75% |
| 28-01-2014 |
8% |
| 20-10-2013 |
7.75% |
| 29-09-2013 |
7.50% |
| 3-05-2013 |
7.25% |
| 17-03-2011 |
6.75% |
| 25-01-2011 |
6.50% |
| 2-11-2010 |
6.25% |
| 16-09-2010 |
6% |
| 27-07-2010 |
5.75% |
| 2-07-2010 |
5.50% |
| 20-04-2010 |
5.25% |
| 19-03-2010 |
5% |
| 21-04-2009 |
4.75% |
| 5-03-2009 |
5% |
| 5-01-2009 |
5.50% |
| 8-12-2008 |
6.50% |
| 3-11-2008 |
7.50% |
| 20-10-2008 |
8% |
| 30-07-2008 |
9% |
| 25-06-2008 |
8.50% |
| 12-06-2008 |
8% |
| 30-03-2007 |
9% |
| 25-06-2008 |
8.50% |
| 12-06-2008 |
8% |
| 30-03-2007 |
7.75% |
| 31-01-2007 |
7.50% |
| 30-10-2006 |
7.25% |
| 25-07-2006 |
7% |
| 24-01-2006 |
6.50% |
| 26-10-2005 |
6.25% |
| 31-03-2004 |
6% |
| 19-03-2003 |
7% |
| 7-03-2003 |
7.10% |
| 12-11-2002 |
7.50% |
| 28-03-2002 |
8% |
What is SLR,CLR and MSF?
1. SLR
SLR stands for Statutory Liquidity Ratio. The Reserve Bank of India (RBI) uses it as a tool for monetary policy to manage and control the liquidity in the banking system.
A specific portion of banks’ Net Demand and Time Liabilities (NDTL) must be kept in liquid assets like gold, government securities, and securities that have been approved by SLR.
Safeguarding the interests of depositors and ensuring the stability and solvency of banks are the main goals of SLR.
2. CLR:
CLR stands for Cash Reserve Ratio. It is a tool of monetary policy that the Reserve Bank of India (RBI) uses to control cash flow and liquidity in the banking sector.
Banks are required by CLR to keep a specific portion of their Net Demand and Time Liabilities (NDTL) as cash or as deposits with the RBI. The RBI sets this percentage, which it may change as part of its monetary policy actions.
CLR’s main goal is to regulate the amount of money in the economy.
3. MSF
MSF stands for Marginal Standing Facility. The Reserve Bank of India (RBI) created it as a monetary policy tool to assist banks in meeting their immediate liquidity requirements under extraordinary circumstances.
Banks may borrow money from the RBI according to the MSF at a rate higher than the repo rate, or standard lending rate, in exchange for eligible securities.
In order to maintain general monetary stability, the goal is to encourage banks to utilize the MSF judiciously and mainly in emergency situations.
Conclusion:
The Reserve Bank of India, uses the repo and reverse repo rates to distribute and borrow money. Repo rate will always be higher than reverse repo rate. The RBI’s financial income is also indicated by the difference between the two rates. It is the interest rate that a nation’s central bank charges commercial banks for loans.
To control economic liquidity, the RBI utilizes the repo rate. Commercial banks borrow money from the central bank when there is a cash shortage, and they must repay it at the current repo rate. These brief loans are given by the central bank in exchange for assets like Treasury Bills or Government Bonds.
The purpose of this monetary strategy is to help the central bank reduce inflation or boost bank liquidity. When it is necessary to manage prices and limit borrowing, the government raises the repo rate. On the other hand, the repo rate is lowered when additional capital is required to promote market expansion. A change in the repo rate eventually has an impact on public borrowings.
Repo Rate – FAQs
Q1. What is Repo Rate?
Repo rate is the interest rate that a nation’s central bank charges commercial banks for loans. To control economic liquidity, the RBI utilizes the repo rate.
Q2. What is the current Repo rate in 2023?
The RBI has set the current Repo Rate at 6.50%.
Q3. What is the current reverse Repo rate?
The current reverse Repo rate stayed the same at 3.35%.
Q4. What happens when the Repo rate increases?
A rise in repo rates translates into an increase in borrowing costs. This is due to the rising borrowing costs for banking institutions, which are then passed on to account holders in the form of higher interest rates on loans and deposits.
Q5. Is repo rate increase good or bad?
An increase in the repo rate translates into an increase in bank interest rates. Banks raise loan interest rates as a way of passing these higher expenses along to their clients. The demand for goods and services declines as a result.
Q6. Does repo rate affect FD rates?
Indeed, fixed deposit (FD) rates are directly impacted by repo rates. An increase in the repo rate causes the FD interest rate to rise, while a decrease in the repo rate causes the FD interest rate to fall.
Like Article
Suggest improvement
Share your thoughts in the comments
Please Login to comment...