Reserve Bank of India recently (30 th oct 2013) increased Repo rate by 25 basis points from 7.50 to 7.75 %.
What is Repo Rate?
Repo Rate is the rate at which banks borrow short term funds from central bank. RBI lends on a short term basis to banks on the security of the govt paper.Banks undertake to repurchase the security at a later date- overnight or few days. RBI charges a Repo rate for money it lends.
Who is the Central Bank?
Reserve Bank of India is Apex governing body of all banks performing their operations in India.
What is the implication of change in Repo Rate?
A reduction in Repo Rate indicates that Banks would be able to borrow money from RBI at a cheaper rate, which in turn will affect the Interest Rate at which banks lend to its customers, in this case interest rates would come down as a result of which more people will apply for loans for various purposes which in turn will lead to overall growth of the economy.
An increase in Repo Rate indicates that banks borrowing from RBI will become costlier, which in turn will affect the Interest Rate at which banks lend to its customers, (in this case, the rates will go up), as a result of which less people will have access to the costlier loans. This is done to curb the rising Inflation.
What is Reverse Repo Rate?
Reverse Repo is when RBI borrows from the Market to absorb excess liquidity with the sale of securities and re-purchases them the next day or after few days. It’s a general practice to keep Reverse Repo Rate 1 % below the Repo Rate.
Consequently the Reverse Repo Rate stands at 6.75% with immediate effect.( As on 30th oct 2013)