Aug 24, 2023

Repo Rate & Reverse Repo Rate: Understanding, Meaning, and Current Rates

by Godrej Properties Limited

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Repo and reverse repo rates are crucial interest rates formulated by the Reserve Bank of India (RBI) to regulate the economy of our country. When diving into the real estate market, it is essential to comprehend these rates and their implications on the financial landscape. This article will delve into repo rate, reverse repo rate, and their significance in the Indian economy.
 

What Are Repo Rate and Reverse Repo Rate?

The repo rate, short for the Repurchase Agreement rate, is the interest rate at which the RBI lends money to commercial banks. When banks require funds or need to maintain liquidity during volatile market conditions, they sell qualifying securities to the RBI and agree to repurchase them at a pre-set price. Currently, the repo rate in India stands at 6.50% as of 29th July 2023.
 

RBI borrows funds from commercial banks at a rate of interest which is the reverse repo rate. When banks have excess funds, they park them with the RBI for a short duration, earning interest on the deposits. India's current reverse repo rate is 3.35% as of 29th July 2023.

How Repo Rate Works?

The RBI uses the repo rate to control the market's money flow. During inflationary periods, the central bank raises the repo rate, leading banks to pay higher interest on the borrowed money. It discourages borrowing, reduces money circulation, and helps curb inflation. Conversely, the RBI lowers the repo rate during a recession to stimulate borrowing and boost economic activity.
 

What are the Key Differences between Repo Rate and Reverse Repo Rate?

The distinction between the two rates lies in their direction of flow and objectives. The repo rate meaning is an instrument to control inflation by managing the money supply in the economy. In contrast, the reverse repo rate regulates liquidity by managing the deposit of excess funds with the RBI.
 

Effect Of Repo Rate and Reverse Repo Rate On the Economy

Changes in repo and reverse repo rates have a ripple effect on the economy. A higher repo rate leads to more expensive loans for consumers, affecting EMIs and interest rates on various types of loans. Conversely, a lower repo rate encourages borrowing and lowers interest rates, stimulating economic growth.
 

Conclusion: Repo Rate vs Reverse Repo Rate

The Repo Rate and Reverse Repo Rate are vital tools in the RBI's monetary policy that regulates inflation, liquidity, and economic growth. By comprehending the interplay between these rates, individuals and businesses can make informed financial decisions in an ever-changing economic landscape. As the country progresses, the wise management of these rates will continue to play a crucial role in shaping its economic trajectory.

 

Frequently Asked Questions

Q: What is Basis Point? 

A: Basis Points are a unit of measurement used in finance to denote the rate of change in an index or benchmark.
 

Q: Who decides the repo rate? 

A: The Reserve Bank of India's Monetary Policy Committee decides the repo rate.
 

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