Understanding Repo Rate & Reverse Repo Rate: How does it affect our economy?
There are a few monetary policies formulated and executed by the Reserve Bank of India (RBI). The purpose of the policy is to control the money supply and rate of interest/cost of the money in the economy to stimulate growth. Promoting economic development through price stability regulation of the volume of the bank, improving the efficiency of the financial system and many others are the key functions of the monetary policies.
Among all the policies the two most crucial ones are Repo Rate and Reverse Repo Rate, that is used by RBI to control the supply of money in the economy.
Before going into the further details about the two rates let us first get clear with the term Reserve Bank of India (RBI), its meaning and uses.
What is RBI?
Reserve Bank of India is the Central Banking institution of India which deals with the issuance and supply of Indian rupee. The Central Bank is also known as Government’s Bank and it is a banker to scheduled commercial banks too. It oversees the monetary issues, manages foreign exchange, issues currency and many other works which lead to the development of the overall economy of the country.
Reserve Bank of India describes its function in the preamble as :
“To regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”
As we all are clear with the basic purpose of the bank, we are ready to move forward.
What is Repo Rate?
The term ‘Repo’ stands for ‘Repurchase Agreement’. It deals with short term, interest-bearing and collateral backed borrowing. It is an instrument which raises the capital for a shorter period of time.
In India, Repo Rate is the rate at which Reserve Bank of India lends money to Commercial Banks whenever there is any scarcity of funds. In other words, it is the rate at which commercial banks sell their securities and bonds to RBI with an agreement of repurchasing them on future data with a predetermined price.
Currently, the repo rate is 6.25%
What is Reserve Repo Rate?
it is just the opposite contract of repo rate. Here, it is the rate at which RBI borrows money from all the commercial banks of India. In other words, it can be also defined as the rate at which the commercial banks of India park their excess money with Reserve bank of India for a short period of time. Currently, Reserve Repo Rate is calculated at 6%
Why these rates are important?
These rates are one of the vital instruments used by the Reserve Bank of India to control the money supply in the economy as it deals with the deficiency of funds and liquidity in the market.
Lending rates and investment rates of a commercial bank with the common people is decided with the help of these rates.
It helps in the stability of price and development of an economy.
What are the effects of Repo Rate?
It has impacts on the Banking system.
Common Man is affected too.
The economy is also affected by the change in the rates
What’s in News?
In the first bi-monthly meet monetary policy meeting of this year (FY19-20), the Reserve Bank of India has decided to cut Repo Rate by 25 basis points (bps) or 0.25% to 6%, on Thursday i.e. April 4, 2019. the policy stance has been maintained as neutral by RBI.
GDP (Gross Domestic Product) growth for 2019-20 has been projected at 7.2%, with risks evenly balanced.