Repo rate is a standard where the banks need to pay RBI interest and that is taken annually from all the scheduled banks. It’s through the change in the repo rate a bank can analyze its current rate of interest and that determines the change in the interest amount on the loans and credit cards the bank can charge from its customers.
The central bank of any country charges some interest from their scheduled financial institutions, and that means all the banks need to pay interest to the central bank for its borrowing. The banks create apps for DSA, and that gives them the businesses as it brings customers, which increases the operational activity of the bank.
In India, all the scheduled commercial banks need to pay a repo rate to the RBI, and banks get cash, which helps commercial institutes get cash that they can use to run their day-to-day operations.
The Current and Past Repo Rates
The repo rate is something that fluctuates throughout the year and it changes depending on the economic activities and conditions in the country. One of the major factors in this is that it’s a tool that helps a country to control inflation and that will help to stimulate economic growth.
In recent days, repo rates have been used to reduce inflation. This has become a tool to push certain industries and can directly be linked to the country’s consumption.
How Often Does the RBI Repo Rate Change?
The RBI’s repo rate is decided by the Monetary Policy Committee, which decides how a business will perform and helps to regulate the market cycle of all the sectors in the economy. For example, when the RBI repo rate increased by 25 basis points from 6.25% to 6.50%, it showed that the authority was vigilant and wanted to curb the country’s inflation.
The rate of change in the RBI repo rates depends on the external and internal factors that affect the country. If things remain stable, the RBI can keep the repo rates fixed for a long time. However, in a critical situation, a central bank can take matters into its own hands and can either increase or decrease the repo rate often to bring control and stability.
The Difference Between Repo and MCLR Rate
There is another term that is there, and many novices tend to confuse between the two. The first one is the repo rate, and the other one is the MCLR (Marginal Cost of Fund based Lending Rate) which the commercial banks determine.
The change in the spending power of the banks introduced the concept of the MCLR. It’s the minimum rate for the banks and gives them a chance to lend. It looks at four metrics of the bank such as the marginal cost of the funds, operating expenses, premium of the tenor, and margin. All these aspects are not the same, and each banks influence MCLR based on it’s quality.
How Inflation Can Be Measured Through Repo Rate
The RBI’s repor rate is closely tied to the inflation of the country and has a close relationship with it. For example, when the inflation of a country is high or rising, the RBI increases the repo rate, which increases the cost of the interest.
It lowers the consumption and slows down the market activity and is a major way to bring back the prices to the previous level due to the fallen demand therefore, it’s one of the great ways to find the correlation between the repo rate and inflation.
Here, a bank needs to sell loans with higher interest rates through its DSA partners when the repo rate gets increased. It slows the demand for credit and, therefore, can help an economy to curb the interest rate.
The Difference Between Repo and Reverse Repo Rate
There is a difference between the repo and the reverse repo rates, and through that, a bank can put the surplus fund with the central bank, and that is known as the reverse repo rate. It’s through the use of these two tools the central bank keeps the economy afloat.
These are some of the main themes of the RBI, which helps to maintain the interest rate and inflation in the economy.