Repo Rate

The repo rate is the interest rate at which the Reserve Bank of India (RBI) loans money to commercial banks. Repo is an abbreviation for Repurchase Agreement or Repurchasing Option. Banks obtain loans from the Reserve Bank of India (RBI) by selling qualifying securities.

The central bank or RBI and the commercial bank would reach an agreement to repurchase the securities at a set price. When banks are short on funds or need to maintain liquidity under volatile market conditions, this is done. The repo rate is utilized by the RBI to manage inflation.

How Does Repo Rate Work?

As previously stated, the repo rate is utilized by the Indian central bank to restrict the flow of money in the market. When the market is impacted by inflation, the RBI raises the repo rate.

An increased repo rate means that banks borrowing money from the central bank during this period will have to pay more interest. This inhibits banks from borrowing money, reducing the amount of money in the market and helping to negate inflation. In the event of a recession, repo rates are also reduced.

Current Repo Rate in India

In September 2022, the Monetary Policy Committee (MPC) stated that the repo rate had been raised by 50 basis points to 5.90%. During its meeting, the MPC agreed to maintain the reverse repo rate at 3.35%. The Bank Rate and also the marginal standing facility rate have been changed to 5.15%.

Reserve Bank of India Repo Rate

Repo Rate

5.90%

Reverse Repo Rate

3.35%

Bank Rate

5.15%

Marginal Standing Facility Rate

5.15%

Calculation of Repo Rate by the Reserve Bank of India

The RBI regulates the repo rate based on the economic situation, as described in the previous paragraph. The central bank determines interest rates based on inflation or recession in the country's market.

What is Reverse Repo Rate?

As the name implies, reverse repo is the inverse contract to the repo rate. The reverse repo rate is the rate at which the RBI borrows funds from the country's commercial banks. It is the rate where the commercial banks in India park excess funds with the Reserve Bank of India, typically for a short period of time.

Distinction Between Repo Rate and Reverse Repo Rate

Central banks and other financial institutions use repo rates and reverse repo rates to manage their daily short-term liquidity. The repo rate is the interest rate at which commercial banks take or borrow money from the Reserve Bank of India. The RBI loans money to commercial banks in exchange for any government securities.

The reverse repo rate is the rate on commercial banks' deposits with the central bank. Most banking organizations choose this safer strategy to secure their funds in the event of a surplus. In other terms, the reverse repo rate is an interest rate paid on cash deposited.

The key distinction between the repo and reverse repo rates is that the repo rate earns income through lending to commercial banks, whereas the reverse repo rate earns interest on funds deposited with the Reserve Bank of India.

The reverse repo rate is utilized to control the economy's liquidity, while the repo rate is utilized to control inflation. The reverse repo rate is always kept lower than the repo rate by central banks.

Repo Rate

Reverse Repo Rate

The lender is the RBI, and the borrower is the commercial bank.

The lender is the commercial banks, and the borrower is the Reserve Bank of India.

The objective of the repo rate is to manage short deficiency of the funds.

It is to reduce the overall supply flow of money in the economy.

The rate of interest for repo rates is higher than that of reverse repo rates.

The rate of interest is lesser than the repo rate.

The interest charge that is applicable to the repo rate is through a repurchase agreement.

The applicable interest charge is through a reverse repurchase agreement.

The mechanism of operation in the case of repo rate for commercial banks gets funds from RBI utilizing government bonds as collateral.

In reverse repo rate, the commercial banks deposit their excess funds with the Reserve Bank of India and get interested from the deposit.

Higher the rate, the cost of the funds in repo rate increases for commercial banks; hence the loans become more expensive.

When the rate is high, the money supply in the economy gets lower as commercial banks park more excess funds with the Reserve Bank of India.

Lowering the rate makes the cost of the funds lower for commercial banks and leads to lower interest rates on loans.

When the rate is low, the money supply in the economy gets higher as banks lend more and lessen the deposits with RBI.

Historical Repo Rates

Following is the list of the historical Repo Rates in India-

Periods

Repo Rates

02 November 2010

6.25%

25 January 2011

6.50%

17 March 2011

6.75%

03 May 2013

7.25%

20 September 2013

7.50%

29 October 2013

7.75%

28 January 2014

8.00%

15 January 2015

8.00%

04 March 2015

8.00%

02 June 2015

7.00%

29 September 2015

7.00%

05 April 2016

7.00%

04 October 2016

6.00%

02 August 2017

6.00%

06 June 2018

6.00%

01 August 2018

7.00%

07 February 2019

6.00%

04 April 2019

6.00%

06 June 2019

6.00%

07 August 2019

5.00%

06 February 2020

5.00%

27 March 2020

4.00%

22 May 2020

4.00%

06 August 2020

4.00%

09 October 2020

4.00%

May 2022

4.40%

08 June 2022

4.90%

05 August 2022

5.40%

30 September 2022

5.90%

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