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Reserve Bank of India - Shanmugam IAS academy in coimbatore
Reserve Bank of India


What’s in news?

The Repo Rate and the Reverse Repo Rate has been revised by the Reserve Bank of India.

Key data’s:

  • The central bank advanced the policy review and the Monetary Policy Committee met over March 24, 25 and 26 to analyse the situation caused by the unprecedented lockdown of the nation and all business activities, before responding with the massive rate cut.
  • MPC voted 4-2 in favour of the reduction of the repo rate by 75 bps.
  • Responded to the coronavirus-induced crisis, RBI has cut 75 basis points and brings down the Repo Rate and Reverse Repo Rate to 4.4% and 4% respectively. This is recorded as lowest since 2009 in the wake of the Global Financial Crisis.
  • The central bank also cut the cash reserve ratio or CRR by 100 basis points to 3 per cent with effect from March 28, unlocking Rs 1.37 lakh crore primary liquidity in the banking system.

Repo Rate:

  • When there’s a shortage of funds, commercial banks in India borrow money from the Reserve Bank of India.
  • A repo rate is nothing but the interest rate the RBI charges commercials banks when they lend funds.
  • This rate is also used by monetary authorities to control inflation.
  • In case of inflation, the central bank may increase the repo rate.
  • This is to discourage commercial banks from borrowing funds, thus reducing the supply of money in the economy and bringing down the inflation rate.
  • Now, when there’s a drop in inflation, the central bank may lower the repo rate. This acts like an incentive, encouraging commercial banks to borrow funds.
  • They will then provide these funds to their customers, increasing the supply of money.

How repo rate impacts EMIs?

  • Ideally, a low repo rate should translate into low-cost loans for the general masses. When the RBI slashes its repo rate, it expects the banks to lower their interest rates charged on loans.
  • This means, the loans offered to the customers have lesser interest rates, decreasing the EMI as well.
  • Similarly, when there’s an increase in the repo rate, loans for the customer are much more expensive because of the hike in the interest rates.
  • This is because commercial banks acquire funds from the central bank at higher prices, which forces them to bump up their lending rates.
  • However, this scenario doesn’t always play out. It has been observed that when the Reserve Bank of India slashes its rates, banks take time to reduce their lending rates. However, when there’s a hike in the repo rate, banks are quick to increase their lending rates.

Links to note:

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