What Is Reverse Repo Rate Definition In Hindi
Choose your reason below and click on the Report button. Fair use is a use permitted by copyright statute that might otherwise be infringing. And just like any bank, it will lend at a higher rate than the rate at which it borrows- in order to maintain a positive spread for itself. Mexico Inflation Rate Edges Up to 4.
Whereas, reverse repo rate deals with liquidity in the economy. If the central bank decides to increase the CRR, the available amount with the banks decreases. Statutory liquidity ratio SLR is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers. SLR is determined by a percentage of total demand and time liabilities.
Time Liabilities refer to the liabilities which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon, and demand liabilities are such deposits of the customers which are payable on demand.
Example of time liability is a six month fixed deposit which is payable on demand only after six months. Example of demand liability is a deposit maintained in saving account or current account that is payable on demand through a withdrawal form such as a cheque, internet banking etc. Marginal standing facility rate is a window for banks to borrow from Reserve Bank of India in emergency situation when inter-bank liquidity dries up completely.
Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility LSF. Liquidity adjustment facility LAF is a monetary policy tool which allows banks to borrow money through repurchase agreements.
LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations. Earlier loans were given as part of Base Rates. Generally NPA refers to an asset which is not producing income. All Rate in Real time can be checked here: All data has been taken for informative and education purposes. RBI enters into an agreement with the bank- that the bank will pledge the securities with RBI for the loan amount, and buy back at the future date at a pre-determined future price.
The repo rate here will determine how much more will the bank SBI pay to RBI for the same security while repurchasing them in future. In the above example, let us suppose SBI has excess liquid money. It means that the demand for loans is less, and inflow of money in the form of savings is more for the bank. Now what will SBI do with the excess money? It can invest it somewhere, but investing in long term plans might mean less liquid options for SBI. So it parks the excess funds with RBI for short term.
Again, it will not give these funds to RBI free of cost, rather charge a rate of interest. That rate of interest is the reverse repo rate. Although the above example of SBI and RBI in two different scenarios makes it abundantly clear, the following table will help you to understand the difference between repo rate and reverse repo rate.
There are more differences between the two, in case of their usage and effect on the economy, let us discuss them ahead. Repo rate and reverse repo rate are often called money market instruments. The central bank RBI uses these instruments to control the supply of money in the economy in order to meet its economic objectives.
Suppose the market is down. Interest rates are very high- you want to buy a house but rate of interest is very high for you to afford. Banks also want to lend more but due to their cost of lending, they cannot lower their rate of interest any further.
RBI wants to solve this for you. It lowers the repo rate. Now banks can borrow any excess money they need, from RBI at a lower rate of interest. Since they are getting money at low rate of interest, they are able to lend it to you at a lower rate of interest as well. Now you see the rate of interest has come down, and you can finally afford a house loan and its EMIs. So the house you were happy to buy with a loan suddenly becomes difficult due to increase in rate interest. And just like any bank, it will lend at a higher rate than the rate at which it borrows- in order to maintain a positive spread for itself.
Suppose you are a bank. You borrow from A and lend the same money to B. Now at present there is a difference of only 25 basis points between the two rates. Repo rate, that is, repurchase rate focuses on buying back government securities from RBI at a pre-determined rate. The key word here is repurchasing. There is a collateral here- the government securities. On the other hand, in bank rate, there is no security with RBI as the focus here is on loan.
So, although both of them serve the same purpose, they are slightly different in terms of their execution. Repo rate is often called a policy rate. RBI observes the economy is slowing down due to less spending by people; it will lower repo rates and make loans cheaper.
In some other quarter, RBI observes inflation is getting out of hand. So it increases repo rate in order to make loans costlier, subsequently driving down demand. Next time you see your home loan rate of interest increasing after an RBI policy review meeting, you will be in a better position to guess what rates they have tweaked, and in what direction.
Latest Repo Rate by Moneycontrol.