Posts tagged bank rates
RBI Raises Repo, Reverse Repo Rates
Before getting into the details, let us first understand -
What is Repo Rate?
Definition of Repo Rate: Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which commercial banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
What is Reverse Repo Rate?
Definition of Reverse Repo Rate: It is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.
In order to tame inflation, anchoring inflationary expectations and considering the signs of strong economic revival RBI on March 19 , 2010 announced Monetary Policy Measures with immediate effects:
- to raise the repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.75 % to 5 %
- to raise the reverse repo rate under the LAF by 25 basis points from 3.25% to 3.5%
This is the second action since January when RBI announced a 75-basis point rise in the cash reserve ratio (CRR) to 5.75 per cent. But, unlike CRR, which is used to manage liquidity in the system, an increase in the repo and reserve repo rates is aimed at signaling an increase in interest rates.
