Detailed about Repo Rates & Reverse Repo Rates
Have you ever given any attention to the process a bank uses to determine the interest rates on loans or savings instruments? The interest rate for customers is determined by the Central Bank of India’s Reserve Bank, which loans money to commercial banks at a set rate. The Monetary Policy Committee (MPC) announces monetary policy every few months. Due to the corona virus epidemic, RBI held the repo rate same for the last two years. The repo rate was raised from 4.40 % to 4.90% and the reverse repo rate was lowered to 3.35 % in June 2022, respectively.
The modest decline during the current quarter is due to macroeconomic issues that have an impact because we live in a much linked society. The benchmark interest rate rise by the US Federal Reserve, which is now 0.75 %, is the largest since 1994 and has had a significant impact on international markets. Due to this, the Reserve Bank of India (RBI) increased the REPO rate by 50 basis points, which prompted most Indian banks to raise the interest rates on house loans, increasing the cost of mortgages.
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Repo Rate and Reverse Repo Rate Definition
The Monetary Policy Committee (MPC) makes decisions about the Repo Rate and Reverse Repo Rate during its bi-monthly meetings. The Governor of the Reserve Bank of India is in charge of the Monetary Policy Committee. Let’s examine the definitions of repo rate and reverse repo rate.
Repo Rate:
The phrase “repo rate” refers to the price at which the Reserve Bank of India (Central Bank of India) loans money to commercial banks in the case of a cash shortage. It is also known as a repurchasing option of repurchasing agreement.
The same rate is also applied to control inflation. If there is inflation, the RBI raises the repo rate to deter commercial banks from borrowing money from the Indian Central Bank. Commercial banks’ refusal to accept funds from central banks limits the amount of money in circulation and aids in the management of inflation. If there is no inflation in the nation, on the other hand, the opposite position is adopted.
Reverse Repo Rate:
The rate at which Indian commercial banks lend money to the RBI is the definition of the term “reverse repo rate.” The Monetary Policy Committee determines it at a bimonthly meeting. The rationale for the commercial bank’s borrowing is that, in exchange, RBI will grant them a competitive interest rate on any excess funds. The reverse repo rate and money supply are inversely correlated; when the reverse repo rate falls, the money supply rises and vice versa.
How much are the Reverse Repo Rate and the Current Repo Rate?
Here is a list that illustrates the repo rate’s historical trajectory. The last time the rate changed was in June:
|
Month of Repo Rate Change |
Repo Rate |
|
June 2019 |
5.75 % |
|
August 2019 |
5.40 % |
|
October 2019 |
5.15 % |
|
March 2020 |
4.40 % |
|
May 2020 |
4.00 % |
|
May 2022 |
4.40% |
|
June 2022 |
4.90 % |
The reverse repo rate chart for the recent years is shown below. Although it was 3.75 % for the previous two years, the reverse repo rate is currently 3.35 %.
|
Month of Reverse Repo Rate Change |
Reverse Repo Rate |
|
May 2019 |
5.75 % |
|
June 2019 |
5.50 % |
|
August 2019 |
5.15 % |
|
October 2019 |
4.90 % |
|
March 2020 |
4.00 % |
|
April 2020 |
3.75 % |
|
May 2022 |
3.75% |
|
June 2022 |
3.35 % |
What Distinguishes The Repo Rate and The Reverse Repo Rate?
Repo rate and reverse repo rate are different in that:
The rate at which the RBI loans money to commercial banks is known as the repo rate.
Reverse repo rates, on the other hand, are the rates at which commercial banks can deposit surplus cash with the Reserve Bank of India and get interest in return.
These rates are yearly compounded.
A Repo Rate Example Is Shown Below
For instance, if HDFC Bank borrows Rs 10 crore from RBI at a rate of 4.40 %, HDFC Bank would be required to return Rs 10.24 crore at the end of the year.
A Reverse Repo Rate Example Is Provided Below
For instance, if Axis Bank deposits Rs 10 crore in excess cash with RBI at a rate of 3.35 percent, it would receive Rs 10.34 crore back from RBI after a year.
RBI’s Lending Procedure for Commercial Banks
All commercial banks are not eligible for loans from the Reserve Bank of India. The RBI initially verifies all securities and bonds. Once the loan has been fully repaid, including the interest charged based on the repo rate, it will maintain these as collateral. RBI has the right to sell the securities if the bank is unable to make payments.
Effects of Reverse and Repo Rates on the Economy
The repo rate and reverse repo rate fluctuate often, as we covered previously. The economy is impacted by these two rates. Let’s examine the effects of change.
Effects of Repo Rate
A repo rate is a crucial tool for the nation’s economic growth. Additionally, it significantly affects the nation’s inflation and aids in keeping the money supply and liquidity under control. To stop the money flow during periods of excessive inflation, the RBI raises the repo rate. Banks will incur greater borrowing costs when the rate is higher. Additionally, it slows down the economy’s money supply and investment. It therefore has a detrimental effect on the economy and aids in containing inflation.
The repo rate is lowered if the RBI needs to inject money into the economy. Commercial banks are urged to borrow money from the RBI rather than lending it to other people in this way. The economy’s total growth rate is enhanced in this way.
Effects of Reverse Repo Rate
When the Reserve repo rate is higher, the economy is affected. Commercial banks decide that it is more practical to deposit the money with the RBI in this situation than lending it to individuals for various uses. Additionally, they might receive favorable interest. The rupee’s value will increase as a result of all these developments. The reverse repo rate is also used to manage inflation by being raised when inflation is low and lowered when inflation is high.
The demand for house loans is another area where a change in the reverse repo rate may be detected. Banks favor lending to individuals and lower home loan rates when the reverse repo rate is higher.
What Exactly Is RBI Monetary Policy?
The country’s financial system is being strengthened by the RBI Monetary Policy, which also serves to stimulate the economy. It is a monetary policy created by the Reserve Bank of India (the Central Bank of India) to control the nation’s financial affairs. It regulates the availability of funds, the cost of credit, interest rates on loans, and the distribution of credit. The RBI’s monetary policy is typically reviewed six times during the fiscal year. The RBI’s monetary policy has three primary goals.
Economic Expansion
Exchange Rate Consistency
Limiting Inflation
Summary
The Central Bank of India’s RBI lends money to other commercial banks at a rate known as the repo rate. In contrast, the reverse repo rate is the rate at which commercial banks can deposit excess cash with the RBI and receive a competitive interest rate. The current repo rate is 4.90 percent, while the reverse repo rate is 3.35 percent. The RBI governors preside over a bimonthly meeting of the Monetary Policy Committee (MPC), which decides these rates.
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