In India, the Reserve Bank of India (RBI) keeps changing the Repo Rate and Reverse Repo Rate to control the economic recovery and inflation in the country. Since the term Repo Rate or Reverse Repo Rate is complex, it is not understood by the common man. Therefore, what is Repo Rate and Reverse Repo Rate, if you do not know, then read this article carefully.
What is Repo Rate
Banks give us loans and we have to pay interest on that loan. Similarly, banks also require huge amount for their day to day operations and they take loan from Reserve Bank of India. The rate at which the Reserve Bank charges interest on this loan from them is called Repo Rate.
In simple words, Repo Rate means the rate of loan given by the Reserve Bank to other banks. With this charge, the bank provides loans to its customers. Lower repo rate means that customers will now get cheaper loan rates for loans such as home loans and vehicle loans, even at lower rates. When banks will get loan at low interest rate i.e. repo rate is low, then they can also give cheap loan to their customers. And if the Reserve Bank raises the repo rate, it will become expensive for banks to take loans and they will make loans costlier for their customers.
What is Reverse Repo Rate
It is opposite to Repo Rate. When banks have a large amount left after a day’s work, they keep that amount in the Reserve Bank. RBI gives them interest on this amount. The rate at which the Reserve Bank gives interest on this amount is called Reverse Repo Rate.
Reverse Repo Rate refers to the rate at which banks get interest on their money deposited with RBI. Reverse repo rate controls the liquidity of cash in the markets. RBI increases the reverse repo rate, so that the bank deposits its money with it to earn more interest. Whenever there is a lot of liquidity in the markets, RBI increases the reverse repo rate, so that banks can deposit their money with it to earn more interest.
Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) refers to the amount that each bank keeps with the RBI, which is a part of its total cash. If the CRR rises, banks will have to keep a larger portion with the Reserve Bank and they will have less money left to lend as loans. That is, banks will have less money to give loans to the common man. If the Reserve Bank lowers the CRR, the cash flow in the market increases.