Repo Rates: The essential factor for Economic growth of the Nation

Last Updated at: March 03, 2020
320
Repo Rate – Meaning, Reverse Repo Rate & Current Repo Rate

As kids, we were always fascinated by how banks never ran out of money. But, one question that triggered each one of us would surely have been what if the bank has no more money, how will the economy run, and how will we get the money? Although banks don’t run out of money, at times, they surely get short of funds. And, in such cases, say, the commercial bank borrows the amount from the Reserve Bank of India. Well, if you’ve always thought that it’s only the account holders that lend money, it’s not true. 

The banks, while lending money also have to pay a certain interest amount to the Reserve Bank of India (RBI), and this rate is called the Repo Rate.

  1. What is the repo rate?

  2. Current repo rate and history

  3. Changes in repo rate and the economy

  4. Reverse repo rates

  5. Impact of repo rates on the economy

  6. Conclusion

 

What is the repo rate?

The term ‘Repo’ stands for repurchase option or agreement. It is defined as the interest rate at which the commercial bank borrows money from the Reserve Bank of India, for their funds or other business requirements. The repo rate is reviewed and changed regularly by the RBI to keep a check of the monetary policy review which includes controlling inflation and the acceleration of economic growth. The repo rate is decided by the RBI governor heading the RBI Monetary Policy Committee.

There are two types of repo rates, these include:

  • Overnight repo: Under this, the transaction and purchase agreement are made just for a day.
  • Term repo: Under this, the amount is borrowed for more than a day, which can be a period of 7, 14 or 28 days. While borrowing a term repo, an auction was announced by the RBI.

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Current repo rate and history

The current repo rate stands at 5.15% for the third consecutive time, indicating stability in the economy.

Update

Rate

6th February’20 5.15%
5th December’19 5.15%
4th October’19 5.15%
7th August’19 5.40%
6th June’19 5.75%
4th April’19 6.00%
7th February’19 6.25%
5th December’18 6.50%
5th October’18 6.50%
1st August’18 6.50%
6th June’18 6.25%
5th April’18 6.00%

 

Changes in repo rate and the economy

The repo rates are changed in order to maintain the stability in the economy of the country by keeping a check on the inflation levels, liquidity and supply of money in the market. As the repo rates, the interest rates for the banks borrowing money also increases. Depending on various factors, these rates are increased or decreased accordingly. This includes:

 

  • Increased inflation: When the inflation rises in the market, attempts are made by the RBI to bring down the monetary flow, and this is done by increasing the repo rate. Although the increase in repo rate has a negative impact on the economy, it is vital to decrease and control the inflation rates. This further leads to the reduction of cash flow in businesses and the market.
  • Increased liquidity: When there is a decrease of funds in the market, and a degradation in the economic growth, the repo is lowered by the RBI. At such times, the businesses and investors find it suitable to invest their money, increase the cash flow and economic growth rate of the market. 

Reverse repo rates

Just like the way in which commercial banks borrow money from the Reserve Bank of India, the RBI also borrows money from the commercial banks at a specified interest rate, which is called the reverse repo rate. In order to maintain the cash flow in the system, generally, the reverse repo is lower than the repo rate. Reverse repo rate allows the banks to invest their amounts for lending purposes, increasing the cash flow and absorbing liquidity in the market for maintaining the money supply stability. 

The current reverse repo rate is at 4.19% being cut down from the earlier, 5.5%.

Impact of repo rates on the economy

The repo rates not just impact the economy of the nation, but also all the businesses and industries so associated. The economy of a country is of utmost priority, as it impacts the working of cash flow patterns, inflation, and liquidity of the nation. The effects of changes in the repo rates include:

  • Economic growth
  • Changes in the consumption patterns of finances
  • Regulating the inflation levels in the economy
  • Availability of cash for the retail customers

Conclusion

With the various advantages and disadvantages of fluctuations in the repo rates, the RBI has to keep a constant check on the economic growth of the nation. Additionally, repo rates are one of the most important tools to maintain stability in the financial market. 

 

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Repo Rates: The essential factor for Economic growth of the Nation

320

As kids, we were always fascinated by how banks never ran out of money. But, one question that triggered each one of us would surely have been what if the bank has no more money, how will the economy run, and how will we get the money? Although banks don’t run out of money, at times, they surely get short of funds. And, in such cases, say, the commercial bank borrows the amount from the Reserve Bank of India. Well, if you’ve always thought that it’s only the account holders that lend money, it’s not true. 

The banks, while lending money also have to pay a certain interest amount to the Reserve Bank of India (RBI), and this rate is called the Repo Rate.

  1. What is the repo rate?

  2. Current repo rate and history

  3. Changes in repo rate and the economy

  4. Reverse repo rates

  5. Impact of repo rates on the economy

  6. Conclusion

 

What is the repo rate?

The term ‘Repo’ stands for repurchase option or agreement. It is defined as the interest rate at which the commercial bank borrows money from the Reserve Bank of India, for their funds or other business requirements. The repo rate is reviewed and changed regularly by the RBI to keep a check of the monetary policy review which includes controlling inflation and the acceleration of economic growth. The repo rate is decided by the RBI governor heading the RBI Monetary Policy Committee.

There are two types of repo rates, these include:

  • Overnight repo: Under this, the transaction and purchase agreement are made just for a day.
  • Term repo: Under this, the amount is borrowed for more than a day, which can be a period of 7, 14 or 28 days. While borrowing a term repo, an auction was announced by the RBI.

Get free legal advice now

Current repo rate and history

The current repo rate stands at 5.15% for the third consecutive time, indicating stability in the economy.

Update

Rate

6th February’20 5.15%
5th December’19 5.15%
4th October’19 5.15%
7th August’19 5.40%
6th June’19 5.75%
4th April’19 6.00%
7th February’19 6.25%
5th December’18 6.50%
5th October’18 6.50%
1st August’18 6.50%
6th June’18 6.25%
5th April’18 6.00%

 

Changes in repo rate and the economy

The repo rates are changed in order to maintain the stability in the economy of the country by keeping a check on the inflation levels, liquidity and supply of money in the market. As the repo rates, the interest rates for the banks borrowing money also increases. Depending on various factors, these rates are increased or decreased accordingly. This includes:

 

  • Increased inflation: When the inflation rises in the market, attempts are made by the RBI to bring down the monetary flow, and this is done by increasing the repo rate. Although the increase in repo rate has a negative impact on the economy, it is vital to decrease and control the inflation rates. This further leads to the reduction of cash flow in businesses and the market.
  • Increased liquidity: When there is a decrease of funds in the market, and a degradation in the economic growth, the repo is lowered by the RBI. At such times, the businesses and investors find it suitable to invest their money, increase the cash flow and economic growth rate of the market. 

Reverse repo rates

Just like the way in which commercial banks borrow money from the Reserve Bank of India, the RBI also borrows money from the commercial banks at a specified interest rate, which is called the reverse repo rate. In order to maintain the cash flow in the system, generally, the reverse repo is lower than the repo rate. Reverse repo rate allows the banks to invest their amounts for lending purposes, increasing the cash flow and absorbing liquidity in the market for maintaining the money supply stability. 

The current reverse repo rate is at 4.19% being cut down from the earlier, 5.5%.

Impact of repo rates on the economy

The repo rates not just impact the economy of the nation, but also all the businesses and industries so associated. The economy of a country is of utmost priority, as it impacts the working of cash flow patterns, inflation, and liquidity of the nation. The effects of changes in the repo rates include:

  • Economic growth
  • Changes in the consumption patterns of finances
  • Regulating the inflation levels in the economy
  • Availability of cash for the retail customers

Conclusion

With the various advantages and disadvantages of fluctuations in the repo rates, the RBI has to keep a constant check on the economic growth of the nation. Additionally, repo rates are one of the most important tools to maintain stability in the financial market. 

 

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