Repo rate: Definition, effect, and RBI’s policy decision

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May 22, 2020 · 2 min read •

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A repurchase agreement (repo) rate is the rate at which the apex bank of the country lends money to commercial banks. Repo rate, devised by monetary authorities, is a monetary policy tool to control inflation.

Investopedia defines repo rate as the following

“A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.”

“For the party selling the security and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.”

Due to extended lock down, the Reserve Bank of India had recently cut key lending rate by 40 basis points to 4%.

What are the effects of such a policy decision

Lending rates would come down making loans cheaper. 

It also affects deposit rates. Savings would be no more profitable.

Reverse repo automatically adjusts to 3.35% from 3.75%.

Help boost growth if combined with a good fiscal policy.

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image: KaiPilger/Pixabay

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