A Repo Rate is nothing but an interest rate at which a commercial bank takes a loan from the central bank in the form the Government securities.
Money is printed by the Central Bank but the outflow of that money from the central bank to the end users which is citizen are done in various ways. One of the ways is through loans.
Loans are essential for industries, businesses, people, etc. for their purchases hence, they take loans from banks. Now, these banks are general commercial banks.
Now, you may ask the question how does a commercial bank get money, well various ways are used in which commercial banks get access to the money to lend, first is the money deposited via a savings account, the profit they make, but the big component of this is loan they take from the RBI.
The Reserve Bank of India provides these commercial banks with loans at a rate called Repo Rate which is lower than the average interest rate that you are offered.
The bank then takes the money and lends it to the user at the higher interest rate and the difference of the interest rate is the profit they make.
If you want to take a loan as a business loan or a home loan then you do wanna consider looking at the repo rate to get an idea of the economy.
If the economy is down then staying away from the floating interest rate is a smart decision and if the economy is booming then it is smart to take floating rate interest for short-term loans.
This can be estimated by looking at the interest rate. how?
Well, that’s what this article, will explain in detail, we will discuss what is repo rate, how it works, the currency repo rate, and much more.
How Does Repo Rate Work?
The Repo Rate acts as a flood gate of the flow of money into an economy. When the floodgates need to be opened, the interest rate is decreased and when the flood rate needs to be closed, the interest rate is hiked.
You may have a question, why do you need to control the flow of money, well the answer is inflation. The biggest enemy of an economy is the inflation.
To control inflation, we need to manipulate the repo rate to ensure that the inflation gets controlled. Let’s understand it in detail.
One of the basic principles of economics is that as the demand for a commodity is increased, the prices will go up, and supply with follow to establish an equilibrium. Similarly, if the supply is cut short, the prices will go up and the demand will get low to establish an equilibrium.
At the macro level, when this basic principle is played out, this is when we see the changes in the repo rate. The prices go up when more people are competing for a particular commodity giving rise to inflation.
To control this inflation, the best method of doing that is to reduce the demand which can be done by cutting down on the demand by reducing the ability of the people to get their hands on money.
When the repo rate is increased, what RBI essentially is doing is cutting the supply of capital from the market which reduces the flow of money into general people reducing the inflation, and quickly establishing the equilibrium.
Establishing equilibrium is important as the demand, supply, and price of the commodity are at their right value when there is equilibrium which contributes toward the growth of the economy.
Current Repo Rate in India
The repo rate and other monetary policy is constituted by the Monetary Policy Committee (MPC) formed by the Central Government and headed by the RBI Governor.
The current repo rate in India is Unchanged at 6.5% and has been there since 8th February 2023. The interest rate is more than the average rate of 4+% but less than 5% which is desirable for developing economies like India. It is “ok” but lower than this repo rate would be good for the GDP.
Historic Repo Rate
The following are the historic repo rates in India, which will help you get a picture of the repo rate-
|Period – Date Effective from
|8th June 2023
|8 February 2023
|7 December 2022
|30 September 2022
|05 August 2022
|08 June 2022
|09 October 2020
|06 August 2020
|22 May 2020
|27 March 2020
|06 February 2020
|07 August 2019
|06 June 2019
|04 April 2019
|07 February 2019
|01 August 2018
|06 June 2018
|02 August 2017
|04 October 2016
|05 April 2016
|29 September 2015
|02 June 2015
|04 March 2015
|15 January 2015
|28 January 2014
|29 October 2013
|20 September 2013
|03 May 2013
|17 March 2011
|25 January 2011
|02 November 2010
What is the Reverse Repo Rate?
When commercial banks have more money than they need, they usually lend the money to the RBI at an interest rate called Reverse Repo Rate. It is usually done as a monetary policy to control the inflation. When a central bank like RBi has to cut the money supply from the economy, then it increases the repo rate and as well as reverses the repo rate to incentivize the commercial bank to reverse lend the Central Bank money.
The latest Repo Rate set by the RBI is 6.50%.
The floating interest rate is calculated by the bank based on the repo rate of RBI. Meaning, if the repo rate is 6% then your interest rate will be 6% + profit set by the bank.
If RBI increases the repo rate, then the supply of money in the economy will be decreased which means the loan interest rate will be increased and you’ll have to pay higher interest rates for the loans. It also means that inflation is also increasing, so your overall cost and expenditure will be increased.
If RBI decreases the repo rate, then the supply of money will increase, which makes getting a loan easy, fast, and profitable. The consumption of goods and services will go up and overall the GDP will be grown faster.