Repo Rate and Reverse Repo Rate 2023 : All You Need to Know

RBI Monetary Policy Review: RBI keeps the REPO Rate Unchanged at 6.5% for the third time in a row The Reserve Bank of India, or RBI, just made a decision that will have an impact on the Indian economy by maintaining the benchmark REPO rate at 6.5%. The Monetary Policy Committee (MPC) previously met in April and June of 2023. For the third time in a row, the MPC has not changed the REPO rate. According to the experts, the RBI's decision to maintain the REPO rate at 6.5% despite worries about growing inflation and the need to keep borrowing costs stable. The status quo will benefit homebuyers because EMIs will continue to drop. The stability of the home loan rates will be aided by the unchanged REPO rates. Additionally, many have anticipated that the RBI will keep things as they are in the near future. Have you ever given any thought to the process a bank uses to determine the interest rates on loans or savings instruments? Depending on the decision made regarding the consumer interest rate, the Central Bank of India and Reserve Bank of India lend money to commercial banks at a specified rate. The Monetary Policy Committee (MPC) announces monetary policy every few months. Due to the coronavirus pandemic, RBI held the repo rate same for the past two years. While the reverse repo rate is now at 3.35%, the repo rate was raised by 25 basis points to 6.50% in February 2023. Given how intertwined our world is, macroeconomic issues are to blame for the minor decline during the current quarter. The benchmark interest rate increase by the US Federal Reserve, which was increased by 0.75%, is the largest since 1994 and has had a significant impact on international markets. Due to this, the Reserve Bank of India (RBI) increased the REPO rate by 50 basis points, which prompted most Indian banks to raise the interest rates on home loans, increasing the cost of mortgages. Real estate buyers are holding onto their funds at this time due to this aspect, along with the intermittent Sensex drop that affects mutual fund investments.

Definition of Repo Rate and Reverse Repo Rate

The Monetary Policy Committee (MPC) makes decisions about the Repo Rate and Reverse Repo Rate during its bi-monthly meetings. The Governor of the Reserve Bank of India is in charge of the Monetary Policy Committee. The Reserve Bank of India's (Central Bank of India) president is Shaktikanta Das. Let's define what the terms repo rate and reverse repo rate mean.

Repo Rate

The word repo rate refers to the price at which the Reserve Bank of India (Central Bank of India) lends money to commercial banks in the case of a cash shortage. It is also known as a repurchasing option or repurchasing agreement. The same rate is also applied to control inflation. If there is inflation, the RBI raises the repo rate to deter commercial banks from borrowing money from the Indian Central Bank. Commercial banks' refusal to accept funds from central banks limits the amount of money in circulation and aids in the management of inflation. If there is no inflation in the nation, on the other hand, the opposite position is adopted.

Reverse Repo Rate

The rate at which Indian commercial banks lend money to the RBI is the definition of the term "reverse repo rate." The Monetary Policy Committee determines it at a bimonthly meeting. The rationale for the commercial bank's borrowing is that, in exchange, RBI will grant them a competitive interest rate on any excess funds. The reverse repo rate and money supply are inversely correlated; as the reverse repo rate falls, the money supply rises and vice versa.

What is the Current Repo Rate and Reverse Repo Rate?

Current repo rate and reverse repo rate is as follows:-

Historic Repo Rate in India

For past few years repo rate in India has been as follows:-

Who Decides Repo Rate and Reverse Repo Rate in India?

The Monetary Policy Committee (MPC), which is presided over by the Governor of the Reserve Bank of India (RBI), determines the repo rate and reverse repo rate in India.

What is the difference between Repo Rate and Reverse Repo Rate?

The difference between repo rate and reverse repo rate is that :

A Repo rate is a rate at which RBI lends money to commercial banks.

Whereas reverse repo rate is at which commercial banks deposit excess funds to the Reserve Bank of India and earn interest in return.

Both these rates are compounded annually.

Here is an example of Repo Rate: For instance, if HDFC Bank borrows Rs 10 crore from RBI at a rate of 4.40%, HDFC Bank will be required to repay the loan with Rs 10.24 crore after a year.

Here is an example of a Reverse Repo Rate: For instance, if Axis Bank deposited Rs 10 crore in excess cash with the RBI at a rate of 3.35%, Axis Bank would receive Rs 10.34 crore in return from the RBI after a year.

Process of RBI Lending Money to Commercial Banks

All commercial banks are not eligible for loans from the Reserve Bank of India. The RBI first verifies the securities and bonds. Once the loan has been paid back, including the interest charged based on the repo rate, it will maintain these as collateral. RBI has the right to sell the securities if the bank is unable to make payments.

Impact of Repo Rate and Reverse Repo Rate on Economy

The repo rate and reverse repo rate fluctuate frequently, as we covered previously. The economy is impacted by these two rates. Let's examine the effects of change.

Impact of repo rate

A repo rate is a crucial tool for the nation's economic expansion. Additionally, it significantly affects the nation's inflation and aids in keeping the money supply and liquidity under control. In order to stop the flow of money, the RBI raises the repo rate when inflation is excessive. Banks will incur higher borrowing costs when the rate is higher. Additionally, it slows down the economy's money supply and investment. It consequently has a detrimental effect on the economy and aids in containing inflation. The repo rate is lowered if the RBI needs to inject money into the economy. Commercial banks are urged to borrow money from the RBI rather than lending it to other people in this way. The economy's total growth rate is enhanced in this way.

Impact of reverse repo rate

When the Reserve repo rate is higher, the economy is affected. Commercial banks decide that it is more practical to deposit the money in the RBI in this situation rather than lending it to individuals for various uses. Additionally, they can receive favorable interest. The rupee's value will increase as a result of all these developments. The reverse repo rate is also used to control inflation by being raised when inflation is low and lowered when inflation is high. The demand for house loans is another area where a change in the reverse repo rate can be detected. Banks favor lending to individuals and lower home loan rates when the reverse repo rate is higher.

What is RBI Monetary Policy?

The country's financial system is being strengthened by the RBI Monetary Policy, which also helps to stimulate the economy. It is a monetary policy created by the Reserve Bank of India (Central Bank of India) to control the nation's financial affairs. It regulates the availability of funds, the cost of credit, interest rates on loans, and the distribution of credit. The RBI's monetary policy is typically reviewed six times during the fiscal year. The RBI's monetary policy has three primary goals.

• Economic growth

• Exchange rate stability

• Control of inflation

Wrapping Up: Repo Rate and Reverse Repo Rate

The Central Bank of India's RBI lends money to other commercial banks at a rate known as the repo rate. In contrast, the reverse repo rate is the rate at which commercial banks can deposit excess cash with the RBI and receive a competitive interest rate. The current repo rate is 5.90%, while the reverse repo rate is 3.35%. The RBI governor preside over a bimonthly meeting of the Monetary Policy Committee (MPC), which decides these rates.