RBI – What is repo rate?

Recently, we see the headlines in Economic times that RBI may increase the repo rate by 25bps. So what is it?

bps stands for ‘base points’. 1 bps= 0.01 %

So an increase in 25bps means at increase of 0.25%


What is a Repo Rate?

The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI.  A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.

In the event of inflation, RBI increases repo rate as this acts as a hindrance for banks to borrow from the RBI. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Percent growth

What is Reverse Repo rate?

Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. An increase in reverse repo rate can prompt banks to secure more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

What is Cash reserve Ratio (CRR)?

CRR is the amount of funds that the banks have to keep with the RBI. If RBI decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system. Scheduled banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 4% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis.

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