HOME
        TheInfoList






Repo rate

Repo (repurchase) rate also known as the benchmark interest rate is the rate at whi

Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the commercial banks for a short-term (a maximum of 90 days). When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is increased, banks can't carry out their business at a profit whereas the very opposite happens when the repo rate is cut down. Generally, repo rates are cut down whenever the country needs to progress in banking and economy.

If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Banks have to pledge government securities as collateral. This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it has to provide government securities at least worth 1 billion (could be more because of margin requirement which is 5%–10% of loan amount) and agree to repurchase them at 1.07 billion (US$15 million) at the end of borrowing period. So the bank has paid 65 million (US$910,000) as interest. This is the reason it is called repo rate.

The government securities which are provided by banks as collateral can not come from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties).

To curb inflation, the RBI increases repo rate which will make borrowing costs for banks. Banks will pass this increased cost to their customers which make borrowing costly in the whole economy. Fewer people will apply for loans and aggregate demand will be reduced. This will result in inflation coming down. The RBI does the opposite to fight deflation. When the RBI reduces the repo rate, banks are not legally required to reduce their own base rate.

The present repo rate is 4%.[109]

Reverse repo rate (RRR)

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate is the short term borrowing rate at which RBI borrows money from banks. The reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies, etc.) which is always risky.

Repo rate signifies the rate at which liquidity is injected into the banking system by RBI, whereas reverse repo rate signifies the

If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Banks have to pledge government securities as collateral. This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it has to provide government securities at least worth 1 billion (could be more because of margin requirement which is 5%–10% of loan amount) and agree to repurchase them at 1.07 billion (US$15 million) at the end of borrowing period. So the bank has paid 65 million (US$910,000) as interest. This is the reason it is called repo rate.

The government securities which are provided by banks as collateral can not come from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties).

To curb inflation, the RBI increases repo rate which will make borrowing costs for banks. Banks will pass this increased cost to their customers which make borrowing costly in the whole economy. Fewer people will apply for loans and aggregate demand will be reduced. This will result in inflation coming down. The RBI does the opposite to fight deflation. When the RBI reduces the repo rate, banks are not legally required to reduce their own base rate.

The present repo rate is 4%.[109]

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate is the short term borrowing rate at which RBI borrows money from banks. The reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies, etc.) which is always risky.

Repo rate signifies the rate at which liquidity is injected into the banking system by RBI, whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Currently, reverse repo rate is 3.35%.[110]

Statutory liquidity ratio (SLR)

Bank rate is defined in Se

Bank rate is defined in Section 49 of the RBI Act of 1934 as the 'standard rate at which RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase'. When banks want to borrow long term funds from the RBI, it is the interest rate which the RBI charges to them. It is currently set to 4.25.[111] The bank rate is not used to control money supply, but penal rates continue to be linked to the bank rate. If a bank fails to meet SLR or CRR requirements then the RBI will impose a penalty of 300 basis points above bank rate.

Liquidity adjustment facility (LAF)

Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with the RBI on an overnight basis against the collateral of government securities.

RBI accepts applications for a minimum amount of 5 crore (US$700,000) and in multiples of 50 million thereafter.

Cash reserve ratio (CRR)

non-performing assets.

Limitations of monetary policy

In developing countries like India, monetary policy fails to show immediate or no results because the

In developing countries like India, monetary policy fails to show immediate or no results because the following factors:

  1. People do not employ alternative investment options. A large section of society still depends on saving accounts, fixed deposits, Public Provident Fund for investment. Commercial banks have large deposits. RBI is not the main or even prominent money supplier for these banks. So whatever monetary action central bank takes has little or late impact on the economy.
  2. RBI decided to remove charges on RTGS (Real Time Gross Settlement System) and NEFT (National Electronic Funds Transfer).[120]

    Regulation of variable pay of bank management

    In November, RBI introduced a set of draft guidelines to regulate the variable pay of CEOs and top management at private banks. The new rules are in line with the Sound Compensation Practices issued by the Financial Stability Board in April 2009. The rules will apply to CEOs, wholetime directors, and material risk takers at private banks, small finance banks and domestic executives of foreign banks. As per the new rules at least 50% of the pay should be based on individual, unit, business and firm wide performance evaluation which will be capped at 300% of the fixed pay. In case of variable pay above 200% then at least 50% of this amount should be via non-cash instruments. Share linked instruments are included as p

    In November, RBI introduced a set of draft guidelines to regulate the variable pay of CEOs and top management at private banks. The new rules are in line with the Sound Compensation Practices issued by the Financial Stability Board in April 2009. The rules will apply to CEOs, wholetime directors, and material risk takers at private banks, small finance banks and domestic executives of foreign banks. As per the new rules at least 50% of the pay should be based on individual, unit, business and firm wide performance evaluation which will be capped at 300% of the fixed pay. In case of variable pay above 200% then at least 50% of this amount should be via non-cash instruments. Share linked instruments are included as part of variable pay. Guaranteed bonus should not be part of the compensation package except in case of joining bonus. The RBI also has put clauses in place to clawback/malus in case of deteriorating performance. The bank shall identify a representative set of conditions when the recovery clause for clawback /malus can be invoked.[121]

    Publications

    A report titled "Trend and Progress of Banking in India" is published annually, as requir

    A report titled "Trend and Progress of Banking in India" is published annually, as required by the Banking Regulation Act, 1949. The report sums up trends and developments throughout the financial sector.[122] Starting in April 2014, the Reserve Bank of India publishes bi-monthly policy updates.[123]

    Committees set up by RBI

    1. ^ https://d-nb.info/1138787981/34