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Repo Rate

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.

Other important rates

Reverse repo rate: The interest rate that the RBI pays commercial banks when they park their excess cash with the central bank is called the reverse repo rate
Bank rate: It is the rate charged by the central bank for lending funds to commercial banks.
Statutory Liquid Ratio: A commercial bank must retain a percentage of liquid cash, gold or other securities as deposits. This is known as Statutory Liquid Ratio or SLR.
Cash Reserve Ratio (CRR): It is a percentage of deposits required by commercial banks to be maintained in the form of liquid cash with the RBI as reserves.
Marginal Standing Facility Rate (MSF): It is a facility extended to commercial banks by the RBI in the event of an emergency to obtain liquidity overnight.

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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GS Analyst: Daily Current Affairs

6th February 2024 (9 Topics)

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Repo Rate

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GS Analyst: Daily Current Affairs

Repo Rate

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