What is Repo Rate?
The repo rate is a key interest rate at which commercial banks borrow money from the Reserve Bank of India (RBI). A decrease in the repo rate means that the RBI is pumping more liquidity into the market, while an increase in the repo rate indicates that the RBI is trying to mop up excess liquidity from the system. It is an important indicator of monetary policy as it is used by RBI to control inflation in the economy.
Why RBI increases the repo rate?
The Reserve Bank of India (RBI) increases the repo rate for several reasons, all of which are aimed at controlling inflation and maintaining economic stability. By increasing the repo rate, the RBI is attempting to make borrowing from banks more expensive and thus reduce consumer spending, which can help keep prices stable.
Repo Rate vs Reverse Repo Rate
Repo rate and reverse repo rate are two important tools used by the Reserve Bank of India to maintain liquidity in the banking system and set the statement of prices. The repo rate is the rate at which the RBI lends to commercial banks against the collateral of government securities, while the reverse repo rate is the rate at which banks park their excess funds with the RBI.
This statement of price helps to make money available in circulation by decreasing or increasing interest rates as per need. When repo rates are increased, it becomes expensive to borrow which decreases spending, thus reducing inflation. Similarly, when reverse repo rates are increased, banks prefer to park their extra money in RBI rather than lend it to consumers, resulting in reduced liquidity.