RBI Monetary Policy Repo Rate

The Repo rate is used to regulate liquidity in the economy. The rate at which the Reserve Bank of India (RBI) lends to the banks is known as the repo rate, which has now been raised by 50 basis points to 5.4% in its monetary policy review.

RBI Monetary Policy Repo Rate

RBI Monetary Policy Repo rate 

The central bank's macroeconomic policy is known as monetary policy. It is a demand-side economic strategy used by a nation's government to achieve macroeconomic goals like inflation, consumption, growth, and liquidity. It involves managing the money supply and interest rate. When banks and the RBI enter into a "repurchase option" or "repurchase agreement," the RBI agrees to lend the banks money.

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. The Reserve Bank of India charges commercial banks in India the repo rate when they borrow money from them. To get these loans from the nation's central bank, commercial banks must deposit securities as collateral, such as government bonds or treasury bills. In times of inflation, central banks raise the repo rate since doing so discourages banks from borrowing from them. In the end, this lowers the amount of money available to the economy, which aids in halting inflation.

The reverse repo rate, which the RBI pays to commercial banks when they deposit their excess cash in the central bank, is identical to the repo rate and is offered by the RBI. In general, the reverse repo rate is less expensive than the repo rate. The RBI uses the repo rate and the reverse repo rate as monetary measures to sustain economic stability in the nation. 

The Monetary Policy of the RBI introduced the idea of repo rates. 

According to these rules, the primary purpose of the repo rate is to manage and regulate the amount of accessible liquidity in the Indian economic system. An increase in these rates restricts the amount of available cash, preventing an inflationary spike and bringing inflation down. Alternately, any decrease in this rate allows commercial lenders to borrow more money because the cost of credit is lower. Reductions in repo rates made as part of current monetary policy are expected to improve financial system liquidity and spur economic growth.

Let's say the nation is experiencing a cash shortage. In this instance, the RBI will lower the repo rate to assist banks in increasing their borrowing and providing loans to the general population at lower rates. To prevent commercial banks from borrowing too much money, the RBI will now raise the reverse repo rate if the nation's economy is facing inflation.

What connection exists between the repo rate and inflation? 

The Indian central bank uses the repo rate to regulate the amount of money available on the market. A higher repo rate aids in lowering the commercial banks' ability to borrow, which, in turn, reduces the flow of cash in the market. This process aids in containing inflation.

Let us assume that the country has been hit by inflation and the RBI has set the repo rate at 10%. In this case, if a commercial bank is borrowing an amount of Rs.10,000 from the central bank, the interest amount for the same will be Rs.1,000. To avoid paying this higher rate of interest, the commercial banks decide to not borrow further from the RBI which reduces the supply of cash in the market. As the flow of cash reduces in the market, the demand is not met. This helps in checking inflation and regulating it accordingly.

Repo rate has a significant impact on the economy like-

  1. Effective control over the economy's inflation rate
  2. Changes in the money supply of the economy
  3. Consumption patterns generally, either up or down
  4. Impact on retail customers' access to cash
  5. global economic expansion

What impact does the repo rate have on the average person's life? 

Repo rates directly affect the lives of ordinary people by raising overall interest rates. The Repo rate is the interest rate that the RBI levies on money borrowed from commercial banks. 

When the repo rate rises, commercial banks' borrowing costs rise along with the interest rate at which they borrow money from the central bank. Commercial banks then raise their lending rates to keep up with the repo rate increase. Therefore, the effective interest rate increases when regular people borrow money from commercial banks, and they end up paying higher interest rates for their loans.

Impact on Loan Interests, FDs, and EMIs-

Banks often raise interest rates on house loans, auto loans, and other loans whenever the RBI raises the repo rate. If banks raise interest rates, borrowers will be affected since equated monthly installments (EMIs) will also increase automatically. 

But when the RBI raises the repo rate, it is probably good news for depositors who put their money in savings accounts and fixed deposits (FDs). Banks will probably pay higher interest rates on FD accounts.

The repo rate has increased by 50 basis points to 5.40 percent, as announced by the Monetary Policy Committee (MPC) in August 2022. The MPC has opted to maintain the reverse repo rate at 3.35 percent following its meeting.

How will the 50 bps increase in the repo rate by the RBI affect your finances?

To reduce the amount of money in circulation in the economy, central banks often increase the benchmark repo rate, which is the interest rate at which commercial banks borrow money by offering the Reserve Bank their assets. There are two major effects of the 50 basis point increase in the repo rate. Repo rate-linked long-term retail loans for both new and current borrowers will increase costs. Retail loans like personal, vehicle and house loans will become more expensive due to the increase in the interest rate at which banks will now borrow money. Therefore, new borrowers should prepare for rising EMIs. On the other hand, depending on how banks pass through the new interest rate boost, bank depositors will receive higher returns on their deposits. Fixed deposits are among these deposits.

FAQs on Current Repo Rate 2022

  • What is the current repo rate?

           The current repo rate is 5.40%.

  • What is the current reverse repo rate?

           The current reverse repo rate is 3.35%.

The MPC has chosen to keep its attention on the removal of accommodation in order to guarantee that inflation would continue to be within the target going forward while promoting growth. India's policies will confront further difficulties as a result of the continued geopolitical tensions and the danger of recession in various economies. However, it is anticipated that internal resilience would help navigate the looming global crisis, with RBI's monetary policy playing a crucial part.