What is Repo Rate and Reverse Repo Rate

Transcript

What is Bank Rate or Repo Rate? Central Bank gives loans to Commercial Banks for lending to Public Rate of Interest charged by Central Banks on these loans is Repo Rate Example RBI gives loan to SBI @ 8% SBI uses this money to give loan to Mr A @ 11% RBI (Central Bank) SBI (Commercial Banks) A (Public) This 8% is called Repo Rate or Bank Rate This 11% is called Lending Rate of Bank Who Determines Repo Rate? Central Bank (Example – RBI in India) Who Determines Lending Rate It is determined individually by each bank Effect of Repo Rate Change –Increase/Decrease What happens if Repo Rate Increase? What happens if Repo Rate Decrease? Suppose RBI increase Repo Rate from 8% to 9% Suppose RBI decrease Repo Rate from 8% to 6% If Repo Rate Increases More interest will be paid by bank to RBI Bank will also charge more Interest from customer People will take less loans Decrease in Money Supply with Public If Repo Rate decreases Less interest will be paid by bank to RBI Bank will also charge less Interest from customer People will take more loans Increase in Money Supply with Public What is Reverse Repo Rate? Commercial Banks sometime makes Deposit with Central bank Rate of Interest received by Commercial Banks from Central Banks on these loans is Repo Rate Suppose Customers deposits 100 Crore in SBI in Savings and FD Account SBI Bank uses this money to give loan to Public of 80 Crore @ 10% p.a Remaining 20 Crore it deposits with RBI @ 6% p.a Who Determines Reverse Repo Rate? It is determined by Central Bank like RBI in India (and not commercial banks) Difference between Repo Rate and Reverse repo Rate It is Rate of Interest Charged By Central Bank From Commercial banks It is applicable on Loan taken By Commercial Banks From Central banks It is Rate of Interest Paid by Central Bank To Commercial banks It is applicable on Deposits made by Commercial Banks with Central banks Both Repo Rate and Reverse Repo Determined by Central Bank (RBI) And not Central banks Effect of Reverse Repo Rate Change What happens if Reverse Repo Rate Increase What happens if Reverse Repo Rate Decrease If Repo Rate Increases Bank will deposit more with Central Bank So less Amount available to give loans People will take less loans Decrease in Money Supply with Public Bank will deposit less with Central Bank So more Amount available to give loans People will take more loans Increase in Money Supply with Public