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What is meant by Repo Rate and Reverse Repo Rate.
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Answer Posted / amar vyas
We are explaining the different rates in monetary policy
used by RBI
Repo (Repurchase) Rate
Repo rate is the rate at which banks borrow funds from the
RBI to meet the gap between the demand they are facing for
money (loans) and how much they have on hand to lend.
If the RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate; similarly, if it
wants to make it cheaper for banks to borrow money, it
reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate.
The rate at which RBI borrows money from the banks (or
banks lend money to the RBI) is termed the reverse repo
rate. The RBI uses this tool when it feels there is too
much money floating in the banking system
If the reverse repo rate is increased, it means the RBI
will borrow money from the bank and offer them a lucrative
rate of interest. As a result, banks would prefer to keep
their money with the RBI (which is absolutely risk free)
instead of lending it out (this option comes with a certain
amount of risk)
Consequently, banks would have lesser funds to lend to
their customers. This helps stem the flow of excess money
into the economy
Reverse repo rate signifies the rate at which the central
bank absorbs liquidity from the banks, while repo signifies
the rate at which liquidity is injected.
Bank Rate
This is the rate at which RBI lends money to other banks
(or financial institutions .
The bank rate signals the central bank’s long-term outlook
on interest rates. If the bank rate moves up, long-term
interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and
lending the same funds at a higher rate of interest. If the
RBI hikes the bank rate (this is currently 6 per cent), the
interest that a bank pays for borrowing money (banks borrow
money either from each other or from the RBI) increases.
It, in turn, hikes its own lending rates to ensure it
continues to make a profit.
Call Rate
Call rate is the interest rate paid by the banks for
lending and borrowing for daily fund requirement. Si nce
banks need funds on a daily basis, they lend to and borrow
from other banks according to their daily or short-term
requirements on a regular basis.
CRR
Also called the cash reserve ratio, refers to a portion of
deposits (as cash) which banks have to keep/maintain with
the RBI. This serves two purposes. It ensures that a
portion of bank deposits is totally risk-free and secondly
it enables that RBI control liquidity in the system, and
thereby, inflation by tying their hands in lending money
SLR
Besides the CRR, banks are required to invest a portion of
their deposits in government securities as a part of their
statutory liquidity ratio (SLR) requirements. What SLR does
is again restrict the bank’s leverage in pumping more money
into the economy.
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