Saturday Brain Storming Thought (254) 21/12/2024
REVERSE REPO RATE
Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks
Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest
The RBI’s Monetary Policy Committee (MPC) decides the reverse repo rate after considering factors such as inflation targets, economic growth and market conditions
Reverse Repo Rate as on today
As on 16 December 2024, the reverse repo rate is 3.35%
Impacts of Reverse Repo Rate on economy
1) Control on Inflation
a) When RBI increases the reverse repo rate, it offers banks a higher interest rate on the money they deposit with the RBI
b) This encourages banks to park more money with the RBI rather than lending it out, thereby reducing the amount of money circulating in the economy
c) Lower money supply helps to curb inflation, stabilizing prices of goods and services
2) Influence on Interest Rates
a) The reverse repo rate acts as a floor for short-term interest rates in the money market
b) Higher reverse repo rates typically lead to increased short-term interest rates for loans and deposits
c) This can make borrowing more expensive for businesses and consumers, potentially slowing economic growth
3) Bank Liquidity Management
a) The reverse repo rate is used to manage liquidity in the banking system
b) By adjusting the reverse repo rate, the RBI can influence the amount of excess liquidity banks hold
c) Increased reverse repo rates can absorb excess liquidity, helping to maintain financial stability
4) Encouragement for Investment
a) Lower reverse repo rates encourage banks to lend more rather than depositing funds with RBI
b) More available credit can stimulate investments by businesses and consumers spending
c) This can boost economic growth, job creation and overall economic activity
5) Exchange Rate Effects
a) Changes in reverse repo rate can influence foreign investment flows
b) Higher rates may attract foreign investors looking for better returns, affecting the exchange rate
c) A stronger currency might result from increased foreign investment, impacting exports and imports
Key Takeaways of Reverse Repo Rate
1) Commercial banks deposit excess funds with RBI and earn interest
2) Increase in reverse repo rate results in lower liquidity in the economy as banks invest with RBI
3) Decrease in reverse repo rate results in higher liquidity in the economy
4) Charged on the reverse repurchasing agreement
5) Helps the RBI control money supply
Repo Rate and Reverse Repo Rate
1) Repo Rate is for RBI loans to banks
2) Reverse Repo Rate is for banks depositing money with the RBI
3) Repo increses money supply
4) Reverse Repo absorbs money supply
Purpose of Reverse Repo Rate
1) RBI uses Reverse Repo Rate to control liquidity in the system
2) If RBI increases the Reverse Repo Rate, indicates its readiness to accept money at higher rate
3) Cash rich banks will use this facility to park their surplus money with RBI
Latest RBI Policy Rates on December 2024
Updated on 06/12/2024
1) Policy Repo Rate- 6.50%
2) Standing Deposit Facility Rate (SDFR)- 6.25%
3) Marginal Standing Facility Rate- 6.75%
4) Bank Rate- 6.75%
5) Fixed Reverse Repo Rate- 3.35%
6) Cash Reserve Ratio (CRR)- 4.00%
7) Stutatory Liquidity Ratio ( SLR)- 18.00%
7 day reverse repo rate
The seven-day reverse repo is a type of short-term loans to central bank uses to increase liquidity and influence other rates in the banking system
Reverse Repo Normalization
Reverse Repo Normalization is a process that involves increasing the reverse repo rate to reduce excess liquidity in the economy and curb inflation
COMPILED BY:-
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
