Published: 9th Feb, 2024
Context
The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC), is likely to keep the repo rate – its key policy rate – unchanged for the sixth consecutive time at 6.5 per cent to meet the 4 per cent consumer price-based inflation (CPI) target.
What is Repo rate?
- Repo stands for “Re Purchase Option”.Repo Rate is the rate at which the central bank (Reserve Bank of India) lends to other banks by buying the securities with an agreement that the bank will buy back on a certain date.
- Repo lending is a short-term lending option to meet the liquidity requirements of commercial banks.
- Repo rate is the rate at which the Reserve Bank of India (RBI) lends to other banks.
- It is a part of the Liquidity Adjustment Facility (LAF)of the RBI.
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Other important rates
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Components of Repo Rate:
- Preventing "squeeze" in the economy -The central bank adjusts the Repo rate in response to inflation. As a result, it seeks to govern the economy by keeping inflation under control.
- Hedging and Leverage- The RBI tries to hedge and leverage by purchasing securities and bonds from banks and providing cash in exchange for collateral deposited.
- Short-Term Borrowing— The RBI lends money for a short length of time, up to an overnight period, after which banks purchase back their deposited securities at a predetermined price.
- Collateral and Securities— The RBI takes gold, bonds, and other forms of collateral.
- Cash Reserve or Liquidity: Banks borrow money from the Reserve Bank of India (RBI) to preserve liquidity or cash reserves as a precautionary measure.
Impacts of repo rate:
- The increased repo rate will discourage banks to borrowfrom the RBI and lending to the customers.
- This in turn will reduce the liquidityand demand in the market.
- It is part of the contractionary monetary policy.
- On the other hand, decreased repo ratewill encourage banks to borrow and lend to customers increasing the liquidity and demand in the market. This is a part of the Expansionary Monetary Policy.
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