Repo Rate, Bank Rate, Reverse Repo Rate

Repo Rate, Bank Rate, Reverse Repo Rate

The terms glossary of repo rate, bank rate, reverse repo rate (reverse rate, bank rate and reverse repo rate) are very similar to each other. And the definitions given in books, internet, make it difficult to understand anything.

(I will try to make you understand these stuffs in a simple way, in a layman language)

Commercial banks often require large sums of money for daily economic operations. For this, the most common option that commercial banks adopt is to borrow from the central bank (Reserve Bank of India). On this loan, the Reserve Bank has to pay some special interest to them.
Do you understand? Okay, let's tell you again.

Commercial banks are in need of a short-term loan whenever there is a shortage of funds or if they need another short-term loan. (Reserve Bank of India).

When the Reserve Bank of India lends money to these banks, it wants some securities from the banks in exchange for cash, so that if there is any future risk, then from these securities That can be accomplished. In such a situation, banks sell some of their securities (usually these include bonds) to the Reserve Bank with the condition that they will buy back their securities at a pre-decided time. back the securities)

In this way, the Reserve Bank also levies some interest on the money borrowed from the Reserve Bank. The rate at which this interest is charged is called the repo rate.

Repo Rate Reduction or Decrease in Interest Rate

Whenever the Reserve Bank reduces the repo rate, it becomes easier for commercial banks to get loans from the Reserve Bank and when the repo rate is increased, the loan given by the Reserve Bank becomes expensive. As I said lowering the repo rate will make it cheaper for banks to take loans from the Reserve Bank and hence banks will reduce their interest rates (what rates will be reduced? The same interest rate that we or the customers would have to pay when taking a loan ), So that maximum amount can be given as loan.

What will happen if Repo Rate is decreased

1. Due to decrease in Repo Rate, banks will be able to give us loan at cheaper rate.
2. We will buy new shiny Nano by taking a loan at a cheaper rate.
3. Businessmen will invest a lot of money in the industry.
4. Employment will be more.
5. We will demand more. Will spend extravagantly in malls, move around in style.
6. Due to high demand, shopkeepers will think that nothing better than this can be a chance to increase prices. And the price of all things will go up.

Conclusion- A decrease in the repo rate ultimately leads to an increase in the value of goods, i.e inflation.

⇥An increase in the repo rate that is, an increase in the interest rate.

The increase in the repo rate simply means that it will become expensive for banks to take loans from the Reserve Bank. It is clear that the interest rate that banks decide to give loans to others (ie us) will also have to be increased and as a result liquidity in the market decreases  Banks find it difficult to get loan from Reserve Bank and they take revenge from us)

⇝When does it repo rate decrease?
When the Reserve Bank increases the repo rate.

What will happen if repo rate is increased

1. The public is able to take less loans, the market will fall down, there is lack of money.
2. Businessmen will be able to take less loan. Will not be able to expand the business. There will be no new investment.
3. What will happen then? We, people like you, will remain unemployed. Those who are in jobs will also be removed.
4. Your expenses will decrease. Instead of two liters of milk, you will buy only one liter of milk. Will work with soap instead of shaving cream.
5. Will demand less (less demand)
6. And because of your low demand, shopkeepers will reduce the price of shaving cream. I mean the value of all goods will fall.

Reverse Repo Rate

The reverse repo rate is the interest rate that the RBI gives to the commercial bank for the loan it has taken. In more simple terms, reverse repo is the rate at which commercial banks lend money to the Reserve Bank.

In fact, commercial banks do not give loans on their own, the Reserve Bank borrows forcefully, by tempting them to take you, I will give you a higher rate of interest which you have lent to me, the father who has stayed, the heart will be bigger For the son. What happens by borrowing that the money from the commercial bank went to the Reserve Bank and in return, the RBI as a mortgage,

The commercial bank keeps some of its bonds with the bank (bonds of the same value as the RBI has borrowed, it was raised somewhere to tell, I could not return, so sell this paper in the market. , You will get money, but this does not happen often.

When the RBI is done, it withdraws the bond (work is finished, digests the money) and here the commercial banks enjoy the interest arising out of the loan given to the RBI, which is fixed by his father. And if the RBI increased this interest more, then the greed of the commercial bank increased. Those who gave their money to the RBI as loans do not ask for it and continue to enjoy the high rate of interest. But who should explain to those idiots that RBI took the cash.

He did the work that RBI had to do. So when the market gets more liquidity, ie inflation increases, the central bank increases the reverse repo rate to reduce liquidity to control inflation, that means paying more interest for the money that it has borrowed from the commercial bank is . With more or less cash, you know what happens.

When liquidity becomes more in the market (when liquidity in the market is more), the central bank increases the reverse repo rate to reduce liquidity to control inflation. Although it is not necessary that through which the Reserve Bank wants to control inflation to the extent it achieves that target, yet the reverse repo rate is considered as an important way of controlling inflation.

Let me make it clear here that Repo Rate, CRR and Reserve Repo Rate are all used to both increase and decrease inflation. But you ask, it seems right to reduce inflation, but why would anyone increase inflation?

Do this as you understand inflation in another way. Understand inflation by the amount of money in the hands of people in the market. When people have more money in their hands, inflation increases and inflation remains low. Both conditions are dangerous for the economy.

The RBI assumes that if the money is reduced from commercial banks, then the general public will also be short of money and if it is increased then the general public will also get a lot of money. And you will remember what I told you. . That when more money comes to the public, then inflation will increase and if less, inflation will decrease. The whole game is on how to reduce more and more money deposited by RBI Commercial Bank.

Cash Reserve Ratio(CRR)

Cash Reserve Ratio is the fund that banks have to keep deposits with the Reserve Bank.
When the RBI wants to reduce the money flow, it raises the level of it (meaning that if a penny is demanded from me, I will put your watt as our father used to do with us in college time). Due to this, banks have to keep more deposits with the Reserve Bank and the funds are reduced with the banks.Obviously, this reduces the cash in the banking system and it is unable to pay money to the public and already the prevailing inflation in the market starts decreasing. And in the opposite case, when the RBI reduces the CRR level, then you are sensible, you must have understood what would happen.

Statutory Liquidity Ratio(SLR)

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