Repo Rates influence our economy largely. It is the rate of interest at which the RBI lends money to commercial banks or financial institutions. It lends the money against government securities. The changes in Repo Rates affect the economy by controlling the cash that moves through it. RBI slashes the rates to supply more money to the economy. When the repo rate goes up it slows down the economy. The current repo rate announced by MPC (Monetary Policy Council) of RBI in October 2021 is 4%.
What is Repo Rate?
The full form of ‘REPO’ Rate is ‘Repurchasing Option’ Rates and it is also known as a ‘Repurchase Agreement’. In times of financial difficulty, banks and financial institutions need loans and pay interest against the funds.
RBI being the apex bank of the country lends funds to commercial banks after they pledge their securities. Commercial banks sell their securities such as gold, treasury bills, or bonds to RBI. They repurchase these securities after repaying the loan. It is also the rate of interest at which RBI lends funds to the banks against their securities.
The monetary policy council sets the repo rate and influences economic activity through it. Repurchasing Option rate impacts liquidity in the economy by determining the rise or drop of the money supply. In turn, these changes drive the retail lending policies of commercial banks. It changes the rate of interest on home loans, bank deposits, and retail loans.
Current Repo Rates in India
|Repo Rate||Effective Date|
How Does the Repurchasing Option Rate Work?
Commercial banks in India borrow money from the RBI similar to how you borrow funds from banks. The interest applicable to the principal amount is known as the cost of credit. Banks pay interest against the amount you borrow. It is the rate at which RBI charges interest.
It is a crucial benchmark for the economy and makes the lending market more competitive. A high Repurchasing Option rate restricts economic activity as banks tend to borrow less money from RBI. If it is low then banks borrow more funds and it increases liquidity in the economy.
How Does the it Affect an Economy?
This is a powerful instrument of Indian monetary policy. It regulates the cost for credit i.e. the rate of interest a bank levies on the money it lends. Overall, the rates impact money supply, liquidity, and inflation levels in the country. The main effects on the economy are:
- Increasing it helps curb inflation– When inflation is rising RBI increases the repo rate to make borrowing costly. Though it negatively impacts the growth of the economy, it helps in controlling inflation.
- Decreasing it boosts liquidity– RBI lowers the repo rate to pump funds into the economy. Consequently, borrowing money becomes cheaper as the overall supply of money in the economy increases.
RBI Repo Rate Policy
The responsibility of conducting the monetary policy rests with the Reserve Bank of India. It specifies the objective to maintain monetary stability in the economy while ensuring its growth. The policy allows RBI to keep inflation and growth under control. Based on an assessment of the current and evolving macroeconomic situation RBI announces the repo rate. Changes in it influence aggregate demand. Market rate fluctuations due to the repo rate transmit across the financial system and improve the country’s economic condition.