Repo Rate

When banks need money they can borrow from the RBI against their surplus government securities at a fixed interest rate. This rate is known as the repo rate.
Repo Rate
  • Basically, this is an abbreviated form of the ‘rate of repurchase’ and in western economies, it is known as the ‘rate of discount’.
  • The higher the repo rate, the higher the cost of short-term money to the banks and vice versa. Generally, whenever the repo rate is raised, banks pass the burden on to customers.
  • If the repo rate is lowered, then banks can potentially charge lower interest rates on the loans taken by borrowers and vice versa.
  • Thus, it will benefit the borrowers as EMIs (equated monthly instalments) will decrease.
  • It will inject liquidity over a period. It has several purposes to serve— a stronger money market, stability, and better costing and signalling of the loan products. Injecting liquidity may lead to inflation in the country.
  • Recently, the Reserve Bank of India (RBI) has decided to lower the interest rate for the fourth consecutive policy review as it reduced the repo rate by 35 bps to 5.40%.
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