Repo Rate

7/29/2019 Repo Rate http://slidepdf.com/reader/full/repo-rate 1/1 Repo (Repurchase) Rate Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands 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. Since 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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Transcript of Repo Rate

7/29/2019 Repo Rate

http://slidepdf.com/reader/full/repo-rate 1/1

Repo (Repurchase) RateRepo rate is the rate at which banks borrow funds from the RBI to meet the gap between thedemands 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 therepo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces therepo rate.

Reverse Repo RateThis is the exact opposite of repo rate.The rate at which RBI borrows money from the banks (or banks lend money to the RBI) istermed the reverse repo rate. The RBI uses this tool when it feels there is too much moneyfloating in the banking systemIf the reverse repo rate is increased, it means the RBI will borrow money from the bank andoffer them a lucrative rate of interest. As a result, banks would prefer to keep their moneywith the RBI (which is absolutely risk free) instead of lending it out (this option comes with acertain amount of risk)Consequently, banks would have lesser funds to lend to their customers. This helps stem theflow of excess money into the economy

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from thebanks, while repo signifies the rate at which liquidity is injected.

Bank RateThis 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 ratemoves 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 rateof interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that abank 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 RateCall rate is the interest rate paid by the banks for lending and borrowing for daily fundrequirement. Since banks need funds on a daily basis; they lend to and borrow from otherbanks 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 haveto keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bankdeposits 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 governmentsecurities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does isagain restrict the bank’s leverage in pumping more money into the economy.