What is the repo rate?
The term 'repo rate' is an abbreviation for 'repurchase rate'. It is the rate at which the Central Bank of a country (Reserve Bank of India) lends money to commercial banks when there is a shortfall of funds. This borrowing happens through the sale of securities, with an agreement to repurchase them at a future date.
The repo rate is a critical tool for the Central Bank to regulate liquidity, control inflation and stabilise the country's economy. By adjusting the repo rate, the RBI can influence the amount of money available in the banking system.
How repo rate works
When commercial banks face a shortage of funds, they borrow money from the RBI at the repo rate. This borrowing is collateralised with government securities. The RBI can control the cost of borrowing by changing the repo rate.
When the repo rate is high, borrowing becomes expensive for banks, which in turn, reduces the money supply in the economy. Conversely, a lower repo rate makes borrowing cheaper, encouraging banks to lend more, thus increasing the money supply.
Effects of repo rate on the economy
Influence on interest rates
The repo rate directly affects the interest rates banks charge. When the RBI raises the repo rate, banks increase their interest rates to maintain profit margins, making loans more expensive and reducing spending. Conversely, a lower repo rate makes loans cheaper, encouraging investment and consumption.
Controlling inflation
The repo rate is a key tool for controlling inflation. By raising the repo rate, the RBI reduces the money supply, curbing high inflation by discouraging borrowing and spending. Lowering the repo rate increases the money supply, combating deflation by encouraging borrowing and spending.
Impact on savings
Higher repo rates lead to better returns on Savings Accounts and Fixed Deposits, encouraging more savings. Conversely, lower repo rates reduce interest rates on savings, making saving less attractive and spending more appealing.
Exchange rates
The repo rate influences exchange rates. A higher repo rate attracts foreign investors seeking better returns, leading to an appreciation of the domestic currency. Conversely, a lower repo rate may cause the currency to depreciate as investors seek higher returns elsewhere.
Investment and economic growth
Lower interest rates from a reduced repo rate make borrowing cheaper for businesses, encouraging investment and fostering economic growth. Higher interest rates can stifle investment, slowing down economic activity.
Also Read: Top 5 tips to maximize Savings Account returns
Conclusion
Understanding what is meant by repo rate and its implications can empower you to make informed financial decisions. By keeping an eye on what is the repo rate today, you can better anticipate changes in loan interest rates, assess the best times to save and understand broader economic policies.
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Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
