Repo & reverse repo.pptx 1
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Transcript of Repo & reverse repo.pptx 1
CHANGES IN REPO & REVERSE
REPO RATE IN INDIA SINCE PAST
FEW YEARS
What is repo rate?Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods.
This is done by RBI buying government bonds from banks with an agreement to sell them
back at a fixed rate.
The RBI wants to make it more expensive for 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
What is reverse repo rate?
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the
short term.
Like the repo, this is done by RBI selling government bonds to banks with the commitment
to buy them back at a future date.
The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn
interest on it.
RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks.
Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.
What Does Basis Point – BPS Mean?
A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial
instrument.
The basis point is commonly used for calculating changes in interest rates,
equity indexes and the yield of a fixed-income security.The relationship between percentage changes and
basis points:1% change = 100 basis points and 0.01% = 1 basis
point.
So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100
basis points.
Overnight repos are 1 day loans;
Term repos have terms of greater than 1 day—usually weeks to months.
The firm that makes the loan for a repo, usually a bank, has a reverse repo position which is simply the
opposite side of a repo.
An open repo is a contractual relationship that allows the borrower to borrow funds up to a certain limit, without signing a new contract—somewhat like
an open credit arrangement.
Characteristics of repo rate
Determinants of repo rateThe repo rate for a particular transaction depends on the following factors:
a) Credit quality: like most other securities, the interest rate varies inversely with the credit quality
of the issuer—the higher the credit quality, the lower the repo rate.
b) Liquidity: greater liquidity lowers trading costs and, therefore, the repo rate.
c) Delivery: if the collateral must be physically delivered, the lender will charge a higher repo rate
to cover its cost.
d) Collateral availability: if the collateral is a special issue that is hard to get, the seller of the collateral
will be able to obtain a lower repo rate from a lender that needs the collateral.
Repos can provide a variety of advantages to the financial market in general & in debt
markets in particular; significantly:Repo is a tool for funding transactions.
For institutions and corporate entities, repos provide a source of relatively inexpensive
finance.
Central banks can use repo and reverse repo as an integral part of their open market operations with the objective of injecting/withdrawing
liquidity into and from the market and also to reduce volatility in short term in particular in
call money rates.
Advantages of repo
Impact of repoChanges in repo & reverse repo rates have an
impact on the following:
Inflation
Credit channel
Interest rates
Exchange rates
Impact on interest rates
The interest rate channel affects the demand for goods and services.
Higher interest rates normally lead to a reduction in household consumption. This happens for several
reasons.
Higher interest rates make it more attractive to save, in other words to postpone consumption, thus
lowering present consumption.
Consumption also falls because existing loans now cost more in terms of interest payments.
Impact on credit channelThe credit channel describes the way in which
monetary policy affects demand via banks and other financial institutions.
If the interest rate rises, banks choose to decrease their lending and instead buy bonds.
This means that households and companies find it more difficult to borrow money.
Companies that are either unable or unwilling to borrow must cut back their activities, postpone
investment and so on, and this dampens activity in the economy.
Impact on exchange rates
The exchange rate channel describes how monetary policy affects the value of the currency.
Normally, an increase in the repo rate leads to a strengthening of the currency.
In the short term, this is because higher interest rates make Swedish assets more attractive than investments
denominated in other currencies.
The result is a capital inflow and increased demand for kronor, which strengthens the exchange rate.
Monetary policy also plays an important part for the exchange rate in the long term.
Impact on inflationHow changes in the repo rate affect inflation
The way in which changes in the repo rate affect inflation and the rest of the economy is known as the
transmission mechanism.
The transmission mechanism is actually not one but several different mechanisms that interact.
Some of these have a more or less direct impact on inflation while others take longer to have an effect.
It is generally held that a change in the repo rate has its greatest impact on inflation.
MOVEMENTS OF REPO & REVERSE REPO SINCE APRIL’O8
Date Repo rate(in %)
Reverse repo rate(in%)
Inflation(in%)
2/1/2009 5.5 4 10.45
4 / 3/2009 5 3.5 8.03
21/4/2009 4.75 3.25 8.7
3/7 /2009 5.5 4 11.89
27/ 7/2009 5.75 4.5 11.89
16/9/2009 6 5 11.64
REPO & REVERSE REPO
IN 2009
2/1/
2009
4/3/
2009
21/4
/200
9
3/7/
2009
27/7
/200
9
16/9
/200
90
1
2
3
4
5
6
7
repo ratesreverse repo rates
GRAPH FOR 2009
jan
mar
may ju
ly sep
nov
02468
10121416
inflation
inflation
Inflation in India for the year 2009
date Repo rate(in %)
Reverse repo rate (in %)
Inflation(in %)
2/1/2010 4.75 3.25 16.22
19/3/2010 5 3.5 14.86
20/4/2010 5.25 3.75 13.33
21/6/2010 5.75 4.5 13.73
27/7/2010 5.5 4 11.25
2/11/2010 6.25 5.25 12.72
REPO & REVERSE REPO IN 2010
2/1/
2010
19/3
/201
0
20/4
/201
0
21/6
/201
0
27/7
/201
0
2/11
/201
00
1
2
3
4
5
6
7
repo ratesreverse repo rates
REPO & REVERSE REPO IN 2010
jan
mar
may ju
ly sep
nov
0
2
4
6
8
10
12
14
16
18
inflation
inflation
Inflation in India for the
year 2010
In the last decade the year 2010, is proving to be the worst as far as liquidity in the banking system is concerned, the cash crunch is at its worst this time.
The banks raising money to the tune of Rs. 1.59 lakh crore, by using the repo route is in indicator of how bad the things are at the moment, as far as liquidity in the banking system is concerned.
The government has unveiled plans of injecting Rs 48,000 crore into the system.Liquidity is expected to remain tight for the rest for the financial year
despite incipient signs pointing towards the contrary.
The signs of easing of liquidity pressures on the market came from the reduced bank borrowings from the Reserve Bank of India's (RBI) repurchase or repo window.
Bank borrowing from the repo window towards the calendar year-end was down to Rs 1.2 lakh crore. Bank borrowings from the repo window had hit an all-time record of Rs 1.72 lakh crore on December 22.
Liquidity conditions
Over the past eight years, the IMF Committee on Balance of Payments Statistics
(Committee) has taken a considerable interest in the statistical treatment of reverse
transactions. At its 2000 meeting, the Committee set up the Technical Group on Reverse
Transactions (TGRT), with the following terms of reference:
• To determine the recording practices (for transactions and positions) for repurchase
agreements and securities lending by the principals, custodians, intermediaries, and
fund managers, depending on the data sources and the information sought —
position or transactions — and whether these transactions/positions can always be
identified
• To determine what are the recording practices for a reverse repurchase
agreement/security borrowing (for the principal, the custodian, the intermediary, or
the fund manager) when a repurchase agreement then is undertaken with the same
instrument
MEASURES TAKEN BY IMF
Recent update
The current repo rate is 6.25%.
The current reverse repo rate is 5.25%
At present, the RBI is planning to sell securities worth Rs.48000 crore in the coming few months.
MADE BYPRIYAL SHAH
ROLL NO: 50MEENAL THAKKAR
ROLL NO: 56HONEY RATHOD
ROLL NO: 9DEEPALI GABA
ROLL NO: 15FAIZAAN AJANI
ROLL NO: 3YASH SEJPAL
ROLL NO:44