All about Repo Rate - PowerPoint PPT Presentation

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All about Repo Rate

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Banks go to the RBI to borrow funds. The bank which borrows from RBI is bound by certain rules and rate of interest is charged on banks, with collateral as security. The rate is called repo rate. – PowerPoint PPT presentation

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Title: All about Repo Rate


1
All about Repo Rate
2
What is a Repo Rate?
  • Repo rate stands for repurchasing option.
  • Suppose a bank is short of funds and cannot meet
    its obligations. It goes to the RBI to borrow
    funds.
  • The bank which borrows from RBI is bound by
    certain rules.
  • The bank has to offer collateral to the RBI in
    return.
  • The RBI charges certain rate of interest from the
    borrower bank. This rate is called Repo Rate.
  • Repo Rate keeps a check on inflation in the
    country by keeping a check on its banks.

3
What is a Repo Rate? Continued
  • In short, Repo rate is
  • The rate of interest at which the RBI lends money
    to banks.
  • RBI control inflation by this method.
  • Banks sell their securities to the RBI and buy
    them back at a predetermined rate at a later
    date.

4
How does Repo Rate work?
  • When a bank goes to the RBI for a fund, it has to
    agree to pay a rate of interest.
  • It must also mortgage its treasury bills of equal
    value for the overnight loan.
  • The agreement states that the treasury bills will
    be bought back by the bank at a predetermined
    rate.
  • Every bank is mandated to have a certain amount
    of liquid cash.
  • Loans are given by the RBI against valid
    securities over and above mandated liquid cash or
    cash reserve ratio (CRR).

5
How does Repo Rate work? Continued
  • A part of the cash reserve ratio of every bank is
    deposited with the RBI to ensure a check on
    inflation.
  • If the inflation level rises beyond a certain
    point, the central bank raises the CRR to gain
    control over the spending of individual banks.
  • When there is less to spend for the bank, people
    find it difficult to get personal loans.

6
How Repo Rate affects the economy?
  • The repo rate is a way adopted by RBI to control
    the economy of India.
  • It controls the rate of interest banks charge
    their customers.
  • The repo rate controls the money supply, the rate
    of inflation, and liquidity.
  • When the inflation rate is high, the RBI tries to
    restrict the money supply in the market by hiking
    the repo rate.

7
How Repo Rate affects the economy? Continued
  • When the repo rate is high, then
  • The banks charge their customers a higher rate of
    interest.
  • Fewer loans are avail by people, industrialists
    and businessmen.
  • There is less investment made.
  • Hence, there is less money in the market. 
  • The negative impact is in the slowing down of the
    economy.
  • However, it brings down the rate of inflation.

8
Impact of the current Repo Rate
  • Repo Rate stands at 5.75 currently.
  • The reason behind current repo rate is inflation,
    which currently below 4 for six months. It is
    expected that inflation will be at this rate for
    next six months also.
  • This will help the industrial growth and boost
    the economy.

9
Repo Rate VS Reverse Repo Rate
Repo Rate Reverse Repo Rate
It is defined as the rate at which commercial banks borrow money from RBI It is defined as the rate at which RBI borrows money
Interestingly, Repo rate is higher than reverse repo rate Reverse Repo Rate is somewhat lower than Repo rate
This is used to control inflation. Reverse Repo Rate controls the supply of the money
10
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