What is Repo Rate of RBI?

I am sure you have come across the term Repo Rate. Factors such as inflation and increasing liquidity totally depend on the Repo Rate, so you might have wondered what is Repo Rate of RBI. Before knowing about the current Repo Rate of RBI let us know what is Repo Rate is and how it works.

When you borrow money from a bank you need to pay interest with the principal amount. Just like that, when a commercial bank needs money during a cash crunch situation, it borrows money from the RBI (Reserve Bank of India). The rate at which the RBI lends money to a commercial bank is called a Repo Rate.

A Repo Rate is also known as the 'Repurchasing option' or 'Repurchase Agreement' where a bank provides security details like Treasury Bills to RBI to get loans from them. This is how a bank gets cash from the RBI while the central bank gets security. We should also note that one of the primary tools with RBI to control inflation in the market is the Repo Rate as it maintains the inflation in the market.

Repo Rates change from time to time. I will show you the rate of every year by providing a chart below:

RBI reduced the Repo Rate by 25% basis from 5.75% to 5.15% and the reverse rate was cut down from 5.5% to 4.9%.

Now that we know the current Repo Rate of RBI let us understand the difference between policy repo and reverse Repo Rate. 

When a bank borrows loans from RBI aka Central Bank after providing governmental securities it is called policy Repo Rate. When RBI offers interest to banks that deposit funds it is called reverse Repo Rate. Hope you understand what is policy rate of RBI and the reverse Repo Rate.

The Repo Rate controls the inflation in the market by increasing the interest rates. This makes it harder to borrow money and this is how RBI brings down the flow of money in the market.

On the other hand, it also increases liquidity by pumping funds into the system. The RBI lowers the Repo Rate so that industries can easily take loans for investment purposes.

Hope you know now the details about what is Repo Rate of RBI.

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