Many of us exactly don’t know what repo rate and reverse repo rate is?This article is going to include the exact meaning of repo rate and reverse repo rate in simple language,which is easily understandable.Do you know,they affect the common people in a significant way?Surprized?Clearing all your doubts,lets get started!
Just like a country has a PM for its smooth functioning and policy making,our commercial banks have RBI(reserve bank of India)as there PM,who Control there functioning and make different policies for them.RBI is also called Central bank of India or Banker’s bank as it acts as a bank for all other banks.Repo rate and reverse repo rate are one of the two major policies of RBI To access economy in market.
Repo Rate(RR)-Any amount of loan,that a bank provides you,on mortgage of something,the interest that bank takes from you,that is depended on repo rate,decided by RBI.So,it is the interest rate at which RBI provide short term loan to commercial banks.When RBI increases the repo rate,commercial banks’s cost of raising loans from central bank becomes high,which in turn leads to the hike in interest rate on loans,which commercial banks provide to the general public.Similarly,when the repo rate goes down,it is easier for the commercial banks to take loans for RBI,and hence interest % on loans are reduced and easy EMI’s are available for public.This is how,the home loans,car loans and other types of loans interest rates get up and down.
As a common person,it is believed that a decreased repo rate is much beneficial as through which,it is easier for the public to get loans,along with good schemes as due to the reduced repo rate,commercial banks get loans at low interest rates.This increases the liquidity in market and more employment in the market for the unemployes.
Reverse Repo Rate(RRR)-As the name suggests,it is the opposite of Repo Rate where,commercial banks keep a part of there profit with RBI,in return of which they get interest,decided by the RBI policy makers.This is done by commercial banks to earn some extra profit.It is also responsible for controlling liquidity of credit in the market.When reverse repo rate is high,commercial banks put there money with RBI,in order to earn more money,which restricts the commercial banks to provide loans in the public.But when RBI wants to increase liquidity and provide currency in the market,RBI decreases this rate,by which commercial banks are discouraged to keep there money with RBI,and instead provide loans to the public,by which currency goes into market and liquidity increases.
CURRENT REPO RATE AND REVERSE REPO RATE AND ITS SIGNIFICANCE DURING LOCKDOWN
In order to tackle with the Pandemic COVID- 19,RBI decided to reduce these primary rate tools.The repo rate was reduced from 5.15% to 4.40%.Hence,repo rate got reduced by 0.75%.Reverse repo rate was reduced from 4.9% to 4%,getting a reduction of 9%.These two rates are used to control the liquidity(credit availability),inflation and economic growth in the Indian market.As per the governor of RBI said,these measures were taken to revive the economic growth,mitigate the impact of covid-19 while ensuring the inflation remains under target.Through this measure of RBI,during this lockdown period,people will easily get loans(because of reduced RR) and commercial banks will be uninterested in keeping there money with RBI (because of the reduced RRR)and employment will be generated in the market.
RBI generally introduces its monetory policies bi-monthly.But due to the Covid-19 Pandemic,RBI had to introduce it on earlier basis.All the bi-monthly policies of the year 2019-2020 were introduced till the month of February.But,To control the economic structure of the country,RBI had to prepone the meeting and take extra ordinary and important decisions.These policy decisions are made by MPC(monetory policy committee) including 6 members.3 from RBI itself and rest of the 3 from government of India.