Current Repo Rate

RBI repo rate is the most important policy interest rate in India. The repo rate is decided by the RBI Monetary Policy Committee headed by the RBI Governor.

What is Repo Rate :- This is the interest rate at which the RBI lends money to licensed commercial banks in case they need short term funds to meet regulatory or business requirements.

Repo Rate as monetary policy signaling tool :- More than anything else, the repo rate is used by the central bank to signal its monetary policy stance to the banks, businesses, government and people at large. RBI reviews the repo rate from time to time as part of the monetary policy review. Generally monetary policy fulfills two objectives – Keeping inflation under control and accelerating the economic growth.

5th February 2021 – RBI keeps Repo Rate unchanged at 4%

RBI, in its first bi-monthly monetary policy for the year 2021, has kept the repo rate unchanged to 4%. This has been done to limit the damage to the economy caused by the second wave of Covid-19. Repo rate is the rate at which the central bank infuses liquidity in the banking system. The reverse repo rate also stands unchanged at 3.35%.

The likely scenarios when repo rate is reduced:

• When the central bank wants to signal lower interest rates in the market
• When RBI is reasonably confident that inflation and fiscal deficit are in control and a demand led price surge is unlikely
• When the economy is slowing down and the RBI wants to accelerate growth by signaling an accommodative monetary policy
• When the external balance of payments situation of the country is seen to be stable by the bank

• As the new MCLR is linked to Repo Rate, any increase in repo rate will lead to increase in MCLR. This will lead to increase in interest rate for borrowers who have taken floating rate home loan, personal loan and business loan.
• As the Repo Rate is increased, the demand for credit facilities (loan) will decrease, due to higher interest rate. This will help RBI and government to control inflation.
• Corporate will be able to get cheaper funds for business expansion. This will help in achieving the growth target.

The likely scenarios when the RBI is likely to raise repo rate are:

• When the central bank wants to signal higher interest rates in the market
• When RBI sees over heating in the economy and perceives a risk that inflation may surge
• When there may be a risk of asset bubbles being created due to excessive capital formation
• When the RBI wants to reduce speculation in foreign exchange or sees a risk of disorderly depreciation of Indian currency

When the RBI cuts repo rate, cost of funds of banks reduces. As a result, the banks are able to advance loans to their customers at a lower cost. Banks typically use the repo rate as a signal to determine their deposit rates, lending rates and base rates.

• The head office of the Reserve Bank of India is located in Mumbai.
• Presently, there are four zonal offices of Reserve Bank of India at Mumbai, Delhi, Kolkata, and Chennai.
• RBI also has nineteen regional offices. These offices are located in various cities such as Thiruvananthapuram, Kanpur, Patna, Nagpur, Lucknow, Mumbai, Kochi, Kolkata, Jammu, Chennai, Delhi, Guwahati, Bhubaneshwar, Bhopal, Hyderabad, Ahmedabad, Chandigarh, Jaipur and Bangalore.

Just as customers deposit their surplus funds with banks and earn extra income on the deposits made; similarly, Banks deposit their excess funds with the RBI. The rate at which RBI provides interest to Banks for depositing funds is called the reverse repo rate. The reverse repo rate is thus the rate at which the RBI borrows money from the banks, instead of lending money to them. A reverse repo rate is, however, lower than a repo rate and is often used to control cash flow. An increase in reverse repo rate might reduce the cash flow in the financial market, and a decrease rate could do otherwise. A high reverse repo rate could help banks earn more interest, and thus will prompt them to keep as much money with the RBI as possible. Also, when RBI reduces reverse repo rate, banks tend to invest their money in other sources like lending loans in the market. This way, the cash flow increases. Therefore, a reverse repo rate affects the liquidity of funds in the financial market.

✅What is the repo rate in India?

The rate of interest at which commercial banks borrow money from RBI against government securities is called the repo rate.

✅How does the repo rate work?

RBI buys government securities from commercial banks at a discounted price. The rate at which it is discounted is the repo rate. After the agreed tenure, the respective commercial bank repurchase those government securities from RBI.

✅What are the components of a repo transaction?

The components of a repo transaction between RBI and commercial banks are:

• The loan given by banks is for overnight or one day.
• Banks sell approved government securities that are above the SLR limit.
• The interest charged by RBI on the advanced loan is called the repo rate.
• The loan availed by banks are repaid after one day, and the securities submitted as collateral is repurchased.

✅How does repo rate affect the economy?

The change of repo rate is aimed to affect the flow of money in the economy. An increase in repo rate decreases the flow of money in the economy, while the decrease in repo rate increases the flow of money in the economy.

✅What is the current repo rate?

The current repo rate in India is 4.00%, effective from 05th Feb 21.

✅What is the difference between the repo rate and reverse repo rate?

Repo rate is the rate at which banks borrow money from RBI. Whereas, the reverse repo rate is the rate of interest at which RBI borrows money from commercial banks.

✅What is Bank Rate, Repo Rate, CRR, SLR?

Bank rate is the rate at which RBI offers loans and advances to domestic banks. Repo rate is the rate charged by RBI for repurchasing the government securities sold by domestic banks.
Cash Reserve Ratio (CRR) is the ratio of cash mandated by RBI to be maintained by commercial banks against its total deposits.
Statutory Liquidity Ratio (SLR) is the reserve required to be maintained by commercial banks in the form of liquid cash, gold reserves, and RBI approved securities before approving any credit to the customer.