Repo Rate? Reverse and Current Repo Rate and its Impacts
Repo rate meaning is the rate on which the commercial banking firms borrow an amount after selling the securities. These securities are sold to the central bank of the country. In India Reserve Bank of India (RBI) is the central bank that purchases these securities and with the help of this other banks maintain the liquidity.
This is generally performed when the banks are short in funds and during some legal conditions as well. Repo rate is an effective and prime tool of RBI that is used to maintain the inflation in the country.
How repo rate works?
When a person takes a loan i.e. borrows money from bank then the interest is charged on the amount the amount that was borrowed. This is known as cost of credit. The same process is associated with banks because there are times when the banks take money on credit from the Reserve Bank and they also have to pay the interest as well and the interest rate that is paid by the banks is known as repo rate.
According to technical terms repo means “Repurchasing Agreement” and “Repurchasing Option”. According to this agreement the banks have to present securities against the loans. For example, Treasury bill is an eligible security for availing these overnight loans.
What is repo rate transaction and components?
Following are the constraints on which repo rate rbi allows to perform transactions with other banks.
Prevention of economy– According to repo rate cut rbi the central bank raises or reduces the current repo rate depending on the level of inflation. Therefore, the aim here is to keep the inflation in control.
Collateral– RBI has certain parameters where gold and bonds are used as securities.
Liquidity– Banks take loan from RBI to maintain the cash reserve and this is performed for precaution.
What is reverse repo rate?
This is the tool that helps in absorbing the liquidity that is present in the market and it restricts the loan taking power of the investors. Both repo rate and reverse repo rate are different from each other because reverse repo rate is a condition where RBI takes loan from other banks.
What is the current repo rate and reverse repo rate of India can easily be understood because when the inflation is high then reverse repo rate will also increase. This helps the banks to earn higher returns on the funds that are excess.
What is the repo rate in India and What is the current repo rate are the mandatory questions that decide the movement of the market. Apart from this, bank rate 2019 decides the current repo rate 2019 and crr and slr rate 2019.