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Writer's picture PRITI SIRDESHMUKH

What is Repo Rate & Reverse Repo Rate? - Current Repo Rate in India 2023

Updated: Jan 3


What is Repo Rate & Reverse Repo Rate? - Current Repo Rate in India 2023
What is Repo Rate & Reverse Repo Rate? - Current Repo Rate in India 2023

Few concepts are as important in the complex world of finance and monetary policy as the Repo Rate and Reverse Repo Rate. An economy's environment is shaped by interest rates, inflation, and general financial security.

 

Table of Content

 

It is a powerful influence on each of these factors, therefore. In a nutshell, as economists explain in 2023, when India’s economy is so unhealthy, it is necessary to understand what these indicators are and how they influence the nation’s performance.


The Basics: What are Repo Rate and Reverse Repo Rate?

Repo Rate

It includes the interest rate the RBI lends to banks and other financial institutions. The repo rate refers to the amount of payment that governments are supposed to give in exchange for their securities. The repo rate is also known as the interest rate of the central bank. The word “Repo” translates as a repurchase option.


Because it affects the market's ability to receive and send money, a shift in the repo rate has the potential to impact the economy. If the central bank is able to increase its profits by lowering the Repo Rate, it could spur economic growth. Conversely, a reduction in the money supply might slow down economic development if the central bank raises the Repo Rate.


Reverse Repo Rate

This is the pace with which the country’s central bank (in this case, the Reserve Bank of India) takes loans from local banks. Such an instrument of monetary policy may be seen as an effective tool for managing the currency in the country.


The money supply decreases if all other variables remain constant when the reverse repo rate increases. Similarly, the money supply grows with an increase in the reverse repo rate.  The amount of money in the market will decrease as a result of commercial banks having more incentives to park their cash with the RBI due to a rise in the reverse repo rate.


What Is India's Repo Rate?

What is India's Repo Rate?
What is India's Repo Rate?

The present RBI bank repo rate has great relevance for India’s banking sector. On February 8, 2023, the Reserve Bank of India announced a 0.25% increase in the repo rate, which now stands at 6.50%. This rise was effective immediately. This was quite a substantial decision to make. The most recent adjustment occurred on December 7, 2022, when the repo rate was set at 6.25%.


The RBI Bank Repo Rate's Significance


The Repo Rate holds vital significance as part of the RBI’s monetary policy. MPC chairman, who also happens to be the RBI Governor, leads a committee consisting of six people. Combined, they set up, guide, and change policy rates depending on the country’s liquidity situation. In case of shortage or surplus of money, it adjusts its policy regarding the changes in RBI rates. When banks use the Repo rate, there are specific details of the exchange in question with the RBI.


  • The RBI lends to banks on the basis of collaterals.

  • It also uses the assets of banks to borrow and hedge/leverage with them.

  • Answer that the RBI gives these banks overnight or term money on a short-time basis through interbank rate loans or transactions.

  • Banks can choose to repurchase securities on a specific date and at a set price, in which they are awarded interest according to the borrowed amount.

  • If banks do not pay back on time, then the RBI can sell these assets at this point.

  • To avoid cash reserve failure, banks can take out loans to compensate for this deficiency.



How Does the RBI Determine the Repo Rate?


The repo rate is fixed by the Reserve Bank of India (RBI) using a range of variables and market circumstances. The rate at which the RBI provides credit to commercial banks is known as the repo rate. The following is a condensed description of how the RBI determines the repo rate:


  • Inflation Assessment: The RBI assesses the rate of inflation in the economy. Inflation is the rate at which the price of goods and services rises per unit of time. As a consequence, if the RBI believes that the situation is out of control, it may decide to raise the repo rate in order to reduce demand and costs and so reduce inflation.

  • Economic Growth: In addition, the repo rate is based on the pace of economic development. Higher repo rates can be an obstacle to growth since they discourage lending to individuals as well as businesses. Alternatively, a cut in repo rates could pump the economy into action by offering cheap loans.

  • Liquidity in the system of the Bank: Liquidity in the banking sector refers to the amount of money held and ready to be used in lending and purchasing goods. These considerations are of the RBI. The RBI could also increase the swap rate if too much cash is available in the market thereby reducing it. Alternatively, if the country experiences a lack of cash then RBI will reduce the repo rate so that the bank would give more loans.

  • Monetary Policy Committee (MPC): RBI’s six-member MPC normally meets at intervals to assess the state of the economy and the repo rate accordingly. The committee first makes considerations for factors like inflation, growth projections, and global economic conditions before choosing.


However, finding the repo rate is a challenging exercise involving an evaluation of pertinent economic variables coupled with an application of keen intellectual sense. RBI has a mission that entails providing an environment conducive for economic growth and ensuring that inflation remains moderate by dealing with multiple factors affecting the economy.


What is Affected by a Change in Repo Rate?


Imagine the repo rate as a thermostat for the economy. When inflation simmers too high, the central bank cranks up the repo rate, tightening the credit spigot. Borrowing becomes costlier, cooling off businesses and consumers' spending enthusiasm. This dampens demand, bringing prices back under control, but the chill can also slow down economic growth. 


Conversely, when the economy feels sluggish, the central bank dials down the repo rate, loosening the credit screws. Borrowing gets cheaper, potentially revving up investments and spending, like adding fuel to the engine. This can accelerate economic growth, but if the gas pedal is pressed too hard, inflation can roar back to life. It's a delicate dance for the central bank, constantly adjusting the repo rate to steer the economy towards a sweet spot – balanced growth with stable prices.


Distinction Between Repo Rate and Reverse Repo Rate


The repo rate and reverse repo rate are two crucial instruments employed by the central bank to regulate the money supply and steer the economy. While seemingly interconnected, they operate in opposite directions, shaping distinct yet complementary roles in managing economic equilibrium.

Key Distinctions:

  • Direction: Repo rate dictates lending, while reverse repo rate governs borrowing.

  • Impact on borrowing costs: Repo rate raises costs, while reverse repo rate offers banks higher returns.

  • Target: Repo rate tackles inflation, while reverse repo rate manages liquidity.



The Historical Timeline of Repo Rate in India (2005- 2023)


The Historical Timeline of Repo Rate in India (2005- 2023)
The Historical Timeline of Repo Rate in India (2005- 2023)


The historical variations in the RBI Repo Rate from 2005 to 2023 are clearly shown in this table, which also highlights the central bank's responsiveness to different economic situations and difficulties.


Date of Change

Current Repo Rate

Change Percentage

Comments

June 8, 2023

Recent increase signals a move towards a tighter monetary policy

February 8, 2023,

Continued upward trend, emphasizing precision in response

December 7, 2022

Notable increase reflects a response to evolving economic challenges

September 30, 2022

Proactive move to address inflation and need for monetary tightening

August 5, 2022

Decisive increase to contain inflation and stabilize financial landscape

June 8, 2022

Upward trajectory continues to navigate economic challenges

May 2022

Modest increase highlights nuanced approach to ensure stability

October 9, 2020

Period of stability with confidence in existing economic conditions

August 6, 2020

Continued status quo, maintaining Repo Rate amid global uncertainties

May 22, 2020

Increase reflects response to emerging economic challenges

March 27, 2020

Significant increase reflects swift response to economic impact of global events

February 6, 2020

Measured increase demonstrates focus on maintaining balance between growth and inflation

August 7, 2019

Incremental adjustments continue, reflecting adaptive approach

June 6, 2019

Moderate increase indicates responsiveness to economic factors

April 4, 2019

Consecutive increase aligns with inflation targeting objectives

February 7, 2019

Consecutive increase underscores commitment to fine-tuning monetary policy

August 1, 2018

Measured increase marks strategic response to prevailing economic conditions

June 6, 2018

Consistent upward trajectory reflects proactive approach

August 2, 2017

Increase aligns with monetary policy objectives and inflation management strategies

October 4, 2016

Measured increase reflects vigilance in maintaining balance between growth and inflation

April 5, 2016

Gradual increase to address economic challenges effectively

September 29, 2015

Noteworthy increase underscores commitment to managing inflationary pressures

June 2, 2015

Increase reflects response to evolving economic conditions

March 4, 2015

Strategic increase underscores emphasis on fine-tuning monetary policy

January 15, 2015

Consecutive increase highlights commitment to managing inflation

January 28, 2014

Rare decrease indicates response to changing economic conditions

October 29, 2013

Decrease aligns with strategy to stimulate economic growth amid global uncertainties

September 20, 2013

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