Repo Rate

Repo Rate

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The central bank of any country lends money to commercial banks at an interest rate. This rate of interest is known as the repo rate. The Reserve Bank of India (RBI), India's central bank, uses the repo rate to control the economy's liquidity. The repo rate is determined based on inflation and fiscal projections by the Monetary Policy Committee (MPC) and the RBI governor, who serves as the committee's chair. The term "repurchase option" or "repurchase agreement" is associated with the repo rate in banking.

Commercial banks borrow money from the central bank when there aren't enough funds. The money is repaid at the repo rate that is in effect. These short-term loans are provided by the central bank against securities like government bonds or Treasury bills. The central bank uses this monetary policy to keep inflation under control or make banks more liquid. The public authority expands the repo rate when they need to control costs and limit borrowings.

On the other hand, when it is necessary to inject additional funds into the market and encourage economic expansion, the repo rate is lowered. A change in the repo rate eventually has an effect on public borrowings like home loans and EMIs, as commercial banks are forced to pay more interest on the money they lend. The repo rate is indirectly influenced by a variety of financial and investment instruments, including the returns from deposits and the loan interest charged by commercial banks. Rate of Reverse Repo: This is the rate at which a nation's commercial banks pay the central bank to store their excess funds there. The reverse repo rate is another monetary policy that the Indian central bank (the RBI in India) uses to control how money moves in the market.

A country's central bank borrows money from commercial banks and pays them interest at the applicable reverse repo rate when needed. The reverse repo rate offered by the RBI is typically lower than the repo rate at any given time. The economy's liquidity is controlled by the repo rate, while the market's cash flow is controlled by the reverse repo rate. The RBI raises the reverse repo rate when the economy experiences inflation to encourage commercial banks to deposit money at the central bank and receive returns. This, in turn, takes a lot of money from the market and makes it harder for the general public to borrow money.