The Reserve Bank of India regulates the economy by implementing its several monetary policies. Repo rate is one of the vital monetary policies formulated by the RBI to balance the flow of money in the economy.
What are the repo and reverse repo rate?
- The rate at which the RBI offers funds to the financial institutions is called the . Increase in the rate results in reduced credit offerings by the financial service providers to their customers. As a result, a downturn occurs in the economy and vice versa. Presently, the rate offered by the RBI is 4%.
- The reverse repo is the rate at which the RBI borrows funds from the financial institutions for a short time frame. Presently, the reverse repo is 3.35%.
Any change in the RBI repo rate also influences the money market and impacts the borrowers.
- Reduction in the policy rate encourages financial institutions to provide more loans to individuals. For instance, if an individual wants to avail a home loan, he/she will be offered the loan an easier rate of interest.
- During inflation, the RBI increases the rate at which it offers credits to financial institutions. The lenders eventually reduce their credit offerings to customers or increase the interests on the loan.
It results in the downfall of growth in the industrial sectors as availing loans with high interest becomes a costly affair for them.
The RBI has recently announced a repo rate cut from 4.40% to 4.00% to encourage more individuals to avail loans. Individuals should know in detail what to except from this rate cut announcement.
RBI changes its policy rate from time to time to stabilise the economy. It is also considered a beneficial tool to control inflation and money supply.
