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Understanding Repo and Reverse Repo Rates

The repo rate is the rate at which banks borrow short term funds from the central bank by selling securities with an agreement to repurchase them later. Lowering the repo rate increases the money supply and encourages business and consumer spending, while raising it has the opposite effect. The reverse repo rate is the rate at which the central bank borrows short term excess funds from banks, in order to absorb liquidity from the economy when there is too much money. Both rates are used by the central bank to regulate the money supply and liquidity.

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32 views12 pages

Understanding Repo and Reverse Repo Rates

The repo rate is the rate at which banks borrow short term funds from the central bank by selling securities with an agreement to repurchase them later. Lowering the repo rate increases the money supply and encourages business and consumer spending, while raising it has the opposite effect. The reverse repo rate is the rate at which the central bank borrows short term excess funds from banks, in order to absorb liquidity from the economy when there is too much money. Both rates are used by the central bank to regulate the money supply and liquidity.

Uploaded by

Medha Singh
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© All Rights Reserved
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REPO RATE

AND
REVERSE REPO RATE
REPO RATE

• Repo rate or repurchase rate is the rate at which banks borrow


money from the central bank (RBI).

• It is for the short period.

• The banks sell their securities (financial assets)with an agreement to


repurchase it at future date at predetermined price.

• It is also called as a repurchase agreement.


EFFECTS OF REPO RATE ON US

• Affects the prime lending rate.

• The prime lending rate affects the interest rates.

• Commercial bank charges Interest to their customers.

• It doesn’t affect fixed rate loans.


WHAT IF REPO RATE ARE LOWERED

• Increase in money supply.

• Encourages business growth and consumer spending.

• However, an increase in the money supply makes the currency more


vulnerable.
WHAT IF REPO RATE IS HIKED

• Decrease in money supply.

• Discourages business growth and consumer spending.

• Hike in repo rate is accompanied by increase in bad debts.

• Loans get costlier.


REVERSE REPO RATE

• Reverse repo rate is the rate of interest at which the central bank
borrows funds from other banks.

• It is also for the short duration

• The banks deposit their short term excess funds.

• Banks earn high interest.


WHAT HAPPENS IN REVERSE REPO

• Reverse repo rate is used by the central bank to absorb liquidity from
the economy.

• When it feels that there is too much money floating in the market, it
increases the reverse repo rate.

• The central bank will pay a higher rate of interest to the banks.
ADVANTAGES OF REVERSE REPO RATE

•  A hike in this rate makes it more lucrative for banks to park funds
with the RBI.

• An increase in the reverse repo rate means that the RBI will borrow
money from the banks at a higher rate of interest.

• Deposit of money becomes risk free.


REPO AND REVERSE REPO IN INDIA

• Regulation of the repo market is a direct responsibility of RBI.

• To increase liquidity, RBI buys government securities from banks


under repo.

• To decrease liquidity, RBI sells the government securities to banks.


CURRENT RATES

REPO RATE 4%

REVERSE REPO RATE 3.35%


CONCLUSION

Thus, we can conclude that repo rate signifies the rate at which liquidity
is injected in the banking system by RBI. Whereas reverse repo rate
signifies the rate at which the central bank absorbs liquidity from the
banks.
THANK YOU

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