What is Repo Rate
What is Repo Rate?
The repo rate is simply the annualised interest rate at which banks borrow money from the Reserve Bank of India (RBI) over a short term. This is generally seen as a way of tiding over a short-term liquidity crunch that is experienced by banks.
Repo technically stands for the word repurchase agreement. Most banks generally have a certain amount of government bonds or securities in their possession. When banks are in need for money they borrow money from the RBI using these government bonds or securities as a collateral. There is however the assurance that the bank will recover these later when the borrowed money is returned. The cost of this transaction takes the form of the repo rate. The repo rate is dependent on factors such as the credit worthiness of the borrower, how liquid the collateral is and the rates of other money market instruments.
What is reverse repo?
The word reverse repo generally accompanies most definitions of repo and is generally considered to be the opposite process. A reverse repo is when the RBI borrows money from the bank. The interest rate at which the bank borrows the money becomes the reverse repo rate. While the repo is generally used to infuse liquidity into the system, the reverse repo is used to reduce the supply of money in the market.
What’s the impact of a Repo Rate changes?
Repo rate reduction makes it easier for banks to borrow money from the RBI at lower rates of interest. This increases the supply of money in the system. It is then expected that with banks being able to arrange their own funds more easily, they will also extend this privilege to their customers and allow them to borrow at lower rates of interest.
The Repo Rate is increased in order to reduce the money supply to the market and tackle inflationary pressures.
The repo rate is simply the annualised interest rate at which banks borrow money from the Reserve Bank of India (RBI) over a short term. This is generally seen as a way of tiding over a short-term liquidity crunch that is experienced by banks.
Repo technically stands for the word repurchase agreement. Most banks generally have a certain amount of government bonds or securities in their possession. When banks are in need for money they borrow money from the RBI using these government bonds or securities as a collateral. There is however the assurance that the bank will recover these later when the borrowed money is returned. The cost of this transaction takes the form of the repo rate. The repo rate is dependent on factors such as the credit worthiness of the borrower, how liquid the collateral is and the rates of other money market instruments.
What is reverse repo?
The word reverse repo generally accompanies most definitions of repo and is generally considered to be the opposite process. A reverse repo is when the RBI borrows money from the bank. The interest rate at which the bank borrows the money becomes the reverse repo rate. While the repo is generally used to infuse liquidity into the system, the reverse repo is used to reduce the supply of money in the market.
What’s the impact of a Repo Rate changes?
Repo rate reduction makes it easier for banks to borrow money from the RBI at lower rates of interest. This increases the supply of money in the system. It is then expected that with banks being able to arrange their own funds more easily, they will also extend this privilege to their customers and allow them to borrow at lower rates of interest.
The Repo Rate is increased in order to reduce the money supply to the market and tackle inflationary pressures.
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