Repo Rate and Reverse Repo Rate 2023 By RBI, Meaning, Objectives

Repo Rate By RBI: Read complete details about Repo Rate By RBI, Meaning, Objectives, Reverse Repo Rate. Also check about the current Repo Rate 2023, Latest Repo Rate News for UPSC exam.

Table of Contents

Repo Rate Meaning

The Reserve Bank of India (RBI) loans to other banks at a rate known as the Repo Rate. It is a component of the RBI’s Liquidity Adjustment Facility (LAF). The Repo Rate is often available for borrowing at the Overnight Repo, 7 Days, and 14 Days Repo. With the RBI, the commercial banks enter into a repurchase arrangement under which they sell G-secs and then purchase them at a different rate than the original price.

The higher repo rate will make banks less likely to borrow money from the RBI and lend it to clients. As a result, the market’s liquidity and demand will decline. The contractionary monetary policy includes it. On the other hand, a lower repo rate will motivate banks to lend and borrow to clients, boosting market liquidity and demand. The Expansionary Monetary Policy includes this. The Repo Rate is set at 6.5% as of the Monetary Policy Review in August 2023.

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Repo Rate Objectives

Inflation

By raising the Repo Rate, the repo rate is utilized as a tool to manage inflation. The RBI works hard to stop the flow of money into the economy when there is high inflation. Increasing the repo rate is one way to do this. As a result, borrowing becomes more expensive for enterprises and industries, which slows market investment and money supply. It consequently has a detrimental effect on economic expansion, which helps to keep inflation under control.

Liquidity

Based on the macroeconomic circumstances, the Repo rate is adjusted to raise or decrease liquidity to change the demand in the economy. On the other hand, the RBI reduces the repo rate when it has to infuse money into the system. As a result, businesses and industries can borrow money for a variety of investment goals at lower rates. The whole money supply of the economy is likewise increased. In turn, this accelerates the rate of economic growth.

Components of Repo Rate

Preventing “squeeze” in the economy

As a result of inflation, the central bank modifies the Repo rate. As a result, it aims to steer the economy via containing inflation.

Hedging and Leverage

The RBI attempts to leverage and hedge by buying assets and bonds from banks and giving money in exchange for deposited collateral.

Short-Term Borrowing

The RBI provides short-term loans, up to an overnight period, following which banks buy back their deposited securities at a set price.

Collateral and Securities

Gold, bonds, and other types of collateral are accepted by the RBI.

Cash Reserve or Liquidity

As a precaution, banks borrow money from the Reserve Bank of India (RBI) to maintain liquidity or cash reserves.

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Reverse Repo Rate

Reverse repo rate is described as the interest rate at which the central bank (in India, the RBI) borrows money from the commercial banks for a brief period of time. The central bank benefits from having a ready source of liquidity when needed. For the money provided by the commercial banks, the RBI offers excellent interest rates.

Additionally, commercial banks keep their excess funds with the RBI since it is seen as secure. The RBI will also pay interest, which provides the banks with a way to earn money on their unused funds.

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Current Repo Rate 2023 By RBI

RBI kept the Repo Rate unchanged at 6.5%. The reverse repo rate remained at 3.35% after the announcement. Standing Deposit Facility rate is 6.25%, Marginal Standing Facility rate is 6.75%, Bank Rate is 6.75%

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RBI Monetary Policy

The monetary authority of a nation implements monetary policy by regulating the money supply or the interest rate on extremely short-term borrowing. To guarantee price stability and foster currency trust, the policy frequently sets inflation or interest rate targets.

Objectives: Monetary Policy

Because price stability is an essential prerequisite for long-term economic growth, maintaining price stability is the primary goal of monetary policy while also keeping growth in mind. Through its consultation process on inflation targeting, the RBI is crucial to India’s effort to keep inflation under control. India currently has a flexible inflation-targeting system.

Monetary Policy: Instruments

Open Market Operations: An instrument known as a “open market operation” entails the purchase and sale of securities such as government bonds from or to members of the general public and banks. The RBI purchases government securities to promote credit flow and sells them to restrict the flow of credit.

Cash Reserve Ratio (CRR): A certain amount of bank deposits, known as the “cash reserve ratio,” are what banks must maintain as reserves or balances with the RBI. The liquidity in the system will be lower and vice versa depending on the CRR with the RBI. From 15% in 1990 to 5% in 2002, the CRR was decreased. The CRR is at 4.5% as of August 2023

Statutory Liquidity Ratio (SLR): All financial institutions are required to keep a specific amount of liquid assets on hand at all times relative to their overall time and demand liabilities. The Statutory Liquidity Ratio is the name for this ratio. Precious metals, bonds, and other non-cash items are retained as the assets. The SLR rate as of August 2023 is 18.00%.

Bank Rate Policy: Bank rates, also referred to as the discount rate, are the fees the RBI levies in exchange for giving the banking sector cash and loans. An increase in the bank rate raises the cost of borrowing for commercial banks, which lowers the amount of credit given to banks, decreasing the amount of money available. An increase in the bank rate is a sign that the RBI’s monetary policy is becoming more restrictive. The bank rate as of August 2023, is 6.75%.

Credit Ceiling: With the help of this instrument, RBI communicates in advance or that loans to commercial banks would be granted up to a specific amount. A commercial direction bank will be cautious in this situation when making loans to the general population. Loans will be distributed to a few select industries. Agriculture sector advances and priority sector lending are just a couple of instances of credit ceilings.

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Repo Rate and Reverse Repo Rate FAQs

What happens when repo rate is high?

An increase in repo rates means an uptick in the cost of borrowing. This is because when the repo rate rises, the borrowing cost for banking institutions also rises, which is passed on to account holders in the form of higher loan and deposit interest rates.

What is repo and reverse rate?

The RBI charges the repo rate when commercial banks borrow funds by leveraging securities. The reverse repo rate is the rate at which banks earn interest when they park surplus funds with the RBI. The repo rate helps control inflation, and the reverse repo rate increases liquidity

What is the current repo rate 2023?

The current repo rate is 6.25%.

What is repo rate with example?

The rate of interest charged by the central bank on the cash borrowed by commercial banks is called the “Repo Rate”. For example: If the Repo Rate is 10% and the loan amount borrowed by a commercial bank from RBI is Rs 10,000, then the interest paid to the RBI will be Rs 1,000.

What is SLR and CRR rate?

CRR is a reserve maintained by banks with the RBI. It is a percentage of the banks' deposits maintained in cash form. SLR is an obligatory reserve that commercial banks must maintain themselves. It is a percentage of commercial banks' net demand and time liabilities, maintained as approved securities.