Repo Rate - Meaning, Reverse Repo Rate & Current Repo Rate & its Impact
Repo Rate
Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.
How Does Repo Rate Work?
When you borrow money from the bank, the transaction attracts interest on the principal amount.
This is referred to as the cost of credit. Similarly, banks also borrow money from RBI during a cash crunch on which they are required to pay interest to the RBI. This interest rate is called the repo rate.
RBI Repo Rate 10 May 2022:
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Repo Rate
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4.40%
|
|
Bank Rate
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4.25%
|
|
Reverse Repo Rate
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3.35%
|
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Marginal Standing Facility Rate
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4.25%
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Check REPO Linked: Home Loan Interest Rate
RBI Repo Rate History 2022 -2020:
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Effective Date
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Repo Rate
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% Of Change
|
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May 2022
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4.40%
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0.4%
|
|
09 Oct 2020
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4.00%
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0.00%
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|
06 Aug 2020
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4.00%
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0.00%
|
|
22 May 2020
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4.00%
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0.40%
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27 March 2020
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4.40%
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0.75%
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6 February 2020
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5.15%
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0.25%
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How Does RBI Calculate Repo Rate?
On the basis of the economic condition, as discussed in the last paragraph, the RBI regulates the repo rate.
The rates are decided by the RBI on the basis of the inflation or recession in the market of the country.
Calculate Your Home Loan EMI: Home Loan Interest Rate
Effects of Repo Rate: on the Banking System
1. Increase in Repo Rate:
Lending rates and deposits offered by banks are impacted by a rise or fall of repo rate. However, it may not have an immediate effect. Banks may analyses their liquidity position and cost of funds before increasing the deposit rates and the lending rates.
After analyzing the cost of funds and liquidity position, banks may begin to pass on their interest rate burden to its end customer in the form of elevated lending rates. That means higher equated monthly instalment for existing borrowers and higher rate of credit for new borrowers.
Home loans and other floating rate loans get majorly affected due to rate change. Higher lending rates may lead to a slowdown of the lending business for the banking sector, which will have an impact on their profitability.
Post analysis of liquidity position, banks may also hike the rate of bank deposit offered to customers to attract more inflow of funds into the banking system.
2. Reduction in Repo Rate:
Banking is the first sector to get affected by any change in monetary policies. It’s a big relief to bank when Reserve Bank of India decides to reduce the repo rate. With the dip in repo rate, banks can borrow from Reserve Bank of India at affordable rate.
With the accessibility of low cost credit, banks may even reduce the lending rates to its customer after analyzing the liquidity condition and the deposit inflows. Banks may offer credit to its end customer at a reduced rate.
As bank loans get affordable, consumers can spend and borrow more while spending a lot less in borrowing. Increased lending business will boost the profitability of the overall banking system.
However, lending rate cut and deposit rate hikes are purely dependent on the bank’s liquidity position and deposit demand from customers.
What is the Reverse Repo Rate?
Reverse repo rate is the rate at which the Reserve Bank of India in case of India borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.
Current Repo and Reverse Repo Rates
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Repo rate
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Reverse repo rate
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4.40%
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3.35%
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Key Points Of Repo Rates:
It is the rate at which RBI lends money to banks
It is higher than the reverse repo rate
It is used to control inflation and deficiency of funds
It involves the sale of securities which would be repurchased in future.
Key Points Of Reverse Repo Rate:
It is the rate at which RBI borrows money from banks
It is lower than the repo rate
It is used to manage cash-flow
It involves the transfer of money from one account to another.