Necessary Parameters to Execute a Repo Transaction

Repo Rate: Key Points

The repo rate simply works as the common rates of interest work on bank loans. But unlike simple loans when a commercial bank needs a loan overnight they seek RBI and the rate of interest charged by the RBI on that loan is called the repo rate. Not every bank can get a loan from RBI as the RBI verifies the securities and bonds held by a bank and keeps them as a guarantee until the bank repay the whole amount with the repo rate. The Repo rate is equally important for both RBI and commercial banks as the repo rate increases government wealth while on the other hand providing cash to the banks to maintain liquidity....

Necessary Parameters to Execute a Repo Transaction:

There are certain necessary parameters for a repo transaction and some of them are mentioned below....

The Effect of the Repo Rate on the Economy:

The repo rate has a huge impact on a nation’s economy as it is essential to regulate the cash flow in the market. The Indian monetary policy controls and regulates the repo rate depending upon the market’s liquidity and inflation cash flow. Additionally, the repo rate directly affects the borrowing capacity of banks as the repo rate is higher borrowing capacity of banks gets reduced. Repo rates play a major role in controlling inflation in the country for example if there is high inflation RBI increases the repo rate thus reducing the cash flow in the market. As the cash flow slows down production capacity and investment slows down thus pulling the inflation rate down. While on the other hand, RBI only decreases the repo rate when there is a fall in the inflation rate thus, this situation encourages banks to borrow money from RBI....

Impact of Reverse Repo Rate on Inflation:

When there is excess liquidity in the market then the reverse repo rate comes into play to absorb the liquidity from the market. Unlike the repo rate in the reverse repo rate, the RBI encourages commercial banks to invest their funds in RBI and receive a decent interest on the principal amount. As a result, the banks remain left with lesser funds thus restricting more investments and leading to a fall in the inflation rate. The commercial banks quickly get convinced to deposit their fund under RBI as RBI is the central bank of India and banks receives a decent interest from the RBI....

Difference Between Repo Rate and Reverse Repo Rate:

Repo Rate                                                     Reverse Repo Rate                                    Rate of interest paid by banks to the RBI Rate of interest paid by RBI to the banks The current repo rate is 6.25% The current reverse repo rate is  3.35%  It is used to increase the liquidity It is used to absorb the liquidity It is always higher than the reverse repo rate It is always lower than the repo rate...

Current Repo Rate and its Impact on the Indian Economy:

The repo rate is not stable and keeps varying with the inflation rate, also modifications in these repo rates have a different impact on every sector. Some sectors observe a significant profit while some may bear huge losses. For two consecutive financial years, RBI has been cutting down the repo rates. As per the RBI, in the financial year 2022-23, this is the consecutive 5th hike and the repo rate for the current quarter of the financial year 2022-23 is 6.25%, however, the reverse repo rate is 3.35% respectively.  This Repo Rate is now touched its highest level since August 2018. A decrease in the repo rate attracts huge investments and thus helps the Indian economy to grow at a rapid pace. The repo rates are varied to keep inflation in control and therefore it has a significant impact on the economy....