Repo Rate, or repurchase rate, is the key monetary policy rate of interest at which the central bank or the Reserve Bank of India (RBI) lends short term money to banks, essentially to control credit availability, inflation, and the economic growth. Repo Rate in India is the primary tool in the RBI’s Monetary and Credit Policy. Other policy rates, such as Reverse Repo Rate and Marginal Standing Facility Rate, are often directly linked with the Repo Rate of RBI. Reverse Repo Rate is, on the other hand, an exact opposite of the Repo Rate. Banks park money with the RBI for short term at the prevailing Reverse Repo Rate.
Repo Rate is the most significant rate for the common man too. Everything from interest rates on loans to returns on deposits is influenced by this crucial rate set by the RBI, which is why interest rates on home loans, car loans and other kinds of borrowings go up and down based on the direction of Repo Rate change. Similarly, banks adjust savings account, fixed deposit returns based on this benchmark.
Significance of the repo rate is that it is the interest rate anchor (short- term) and is used by the RBI to target inflation. It is the most important monetary policy tool of the RBI and because of its importance, repo rate is known as ‘the policy rate’.
Under the inflation targeting monetary policy framework repo rate is considered as the only policy instrument to influence the targeted inflation and thus to achieve price stability.
Following procedures are there under a repo transaction between the RBI and commercial banks:
1. Banks give eligible securities (securities identified by the RBI {like government bonds} and at the same time which are above the SLR limit) as collateral to the RBI.
2. RBI gives one day/overnight loan to the banks and charges an interest rate called repo rate from the bank.
3. Bank repays the loan after one day and repurchases the security it has given as collateral. Reverse repo is the opposite of repo. Here, commercial banks deposits money with the RBI while getting an interest rate called reverse repo rat
0 comments:
Post a Comment