Repo Rate

3.Repo Rate: RBI’s Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points (bps) to 6.25% due to easing inflation and global growth concerns.

• About Repo Rate: Interest rate at which the central bank (RBI) lends money to commercial banks.
• Purpose: Used to regulate liquidity in the economy.
• Process: Commercial banks borrow from RBI against government securities (e.g., treasury bills).

oThe borrowed amount is repaid with interest as per the repo rate.

• Impact: Increase in repo rate: Controls inflation by making borrowing costlier.

oDecrease in repo rate: Boosts liquidity by reducing borrowing costs.

oAffects loan EMIs, deposit returns, and financial markets.

• About Reverse Repo Rate: Interest rate at which RBI pays commercial banks for parking excess funds, regulates cash flow in the market.

oProcess: RBI borrows from banks and pays interest as per the reverse repo rate.

oImpact: Increase in reverse repo rate: Encourages banks to deposit more, reducing market liquidity (used to control inflation).

oLower reverse repo rate: Discourages deposits, increasing liquidity.