What is Repo Rate?

The repo rate, short for repurchase rate, is tool by the Reserve Bank of India (RBI) to manage the country's financial system. It's the interest rate at which the RBI lends short-term funds to commercial banks. 

1.      Banks Borrow from RBI:When a commercial bank faces a shortage of funds, they can borrow from the RBI by selling government securities like bonds.

2.      Repurchase Agreement: This borrowing happens through a repurchase agreement (repo). The RBI agrees to buy back these securities from the bank on a future date, usually the next day.

3.      Interest on Loan: The interest charged on this loan is the repo rate.

How Repo Rate Affects the Economy

The RBI strategically adjusts the repo rate to influence aspects of the economy:

·       Controlling Inflation: The RBI increases the repo rate when inflation is high. This makes borrowing from the RBI more expensive for banks, discouraging them from taking out loans. As a result, the money supply in the economy decreases, helping to control inflation.

·       Encouraging Economic Growth: The RBI lowers the repo rate during an economic slowdown. This makes borrowing cheaper for banks, incentivizing them to lend more. Increased lending leads to more money circulating in the market, stimulating economic activity.

Current Repo Rate in India

As of today, May 12, 2024, the repo rate in India stands at 6.50%, as announced by the RBI on February 8, 2024.

Impact of Repo Rate Changes

Changes in the repo rate can have a ripple effect across sectors:

·       Loan Interest Rates: Banks typically adjust their lending rates (interest rates on loans) based on the repo rate. A higher repo rate can lead to higher interest rates on various loans, including personal, car, and home loans.

·       Deposit Rates: Conversely, changes in the repo rate can also influence banks' fixed deposit (FD) interest rates. However, the impact on deposit rates may not be as direct or immediate as on lending rates.

·       Stock Market: Repo rate adjustments can also affect the stock market. A lower repo rate can boost stock prices, while a higher rate might lead to a correction.

Reverse Repo Rate: The Other Side of the Coin

While the repo rate focuses on lending to banks, the reverse repo rate deals with the opposite scenario. It's the interest rate the RBI offers to commercial banks when they deposit their surplus funds with the central bank. This rate is usually lower than the repo rate.

Differences Between Repo Rate and Reverse Repo Rate

Conclusion 

The repo rate, or repurchase rate, is the interest rate at which a country's central bank lends money to commercial banks, typically against government securities. It serves as a tool for controlling inflation and regulating the supply of money in the economy. By increasing the repo rate, the central bank can make borrowing more expensive, thereby reducing spending and inflation. Conversely, lowering the repo rate makes borrowing cheaper, encouraging spending and investment. This rate is a critical component of a country's monetary policy.