Current Repo Rate 

Repo Rate (RR) is the rate at which the central bank of the country, i.e. the Reserve Bank of India (RBI), lends money to commercial banks or financial institutions in lieu of securities to maintain liquidity during shortage of funds or because of some statutory measures. It is one of the key tools of RBI to keep inflation under control. Any changes in Repo Rate impact the flow of money in the market. The current Repo Rate is 6.50% p.a.

Current RBI Repo Rate 2023

Additional Info: You can also check Best Home Loan Interest Rates

Repo Rate meaning or full form is ‘Repurchasing Option’ Rate. It is also called the ‘Repurchasing Agreement’. People borrow loans from banks in times of financial requirement and pay interest on the borrowed amount. Similarly, commercial banks and other financial institutions also go through shortage of funds sometimes. At that time, they can also borrow funds from the country’s apex bank, which is RBI in India. The Central Bank of any country lends money to commercial banks and other financial institutions at an interest rate, known as RBI Repo Rate, on the principal amount.

Repo Rate is one of the main Monetary Policies of RBI. The Governor of RBI presides over the bi-monthly meetings of MPC or the Monetary Policy Committee, which usually consists of 6 members. They formulate, administer and modify the policy rates together. The RBI changes the rates as per the liquidity crunch or surplus in the nation.

Additional Info: Also check HDFC MCLR Rate Today

There are some components of Repo Rate transaction between banks and the RBI as below:

• RBI lends money to the commercial banks in a legal agreement that requires collateral in the form of securities and bonds. RBI leverages against these securities offered by banks to lend monetary help.
• Repo Rate loans or transactions equals short-term borrowings. Banks receive overnight or term funds from RBI while the RBI has the securities.
• Securities can be repurchased by banks on a specified date and at a predetermined price. This predetermined price is the loan amount and the interest on it is calculated at the Repo Rate.
• RBI is authorized to sell the securities if banks become defaulters or fail to repay the cash on the predetermined date.
• Banks borrow money to deal with a cash reserves deficiency or to maintain the minimum reserve balance as a statutory measure.
• The RBI periodically decides whether to hike or slash the RR or leave it unchanged. The RBI's monetary policy committee's decision can impact liquidity and inflation in the country’s economy.
• The RR is a very important tool of the RBI to control inflation trends in the country. Increasing or reducing the rates makes borrowing more expensive or cheaper for commercial banks.
• The RR and inflation have an inverse relationship. If the RR is increased, it brings down the inflation and if it is lowered, inflation will go up.

Additional Info: Also check SBI Home Loan EMI Calculator

As mentioned above, even a few basis points (BSP) change in Repo Rate can have a huge impact. Repo Rate influences credit availability, inflation, liquidity, and the economic activities in the nation. When the financial system goes through even the slightest of change, the economy can flourish or suffer. Likewise, the country’s economy must be pushed down sometimes to stabilize inflation.

Below are the impacts of hike or reduction in Repo Rate:

Impact on inflation and economy: When the Repo Rate is high, banks are hesitant to borrow from RBI to avoid paying high interest rates. At that time, banks take precautions not to overspend their cash reserve by minimising their loan grants. This halts the money flow and the economic activities. However, it also prevents inflation. When RBI slashes the rate, it enables the banks to borrow, spend and invest more. Increased cash flow will result in faster business cycles and a boom in the economy.

Impact on bank loan rates: When the RR is high, banks are bound to clear off their loans to the RBI with a higher interest amount. As a result, the banks may charge a higher rate of interest on loans to borrowers to compensate for the same. Fundamentally, RBI discourages borrowing by banks and banks discourage the customers. This process drains out surplus liquidity from the market, resulting in controlling the inflation rate. As the RR declines, banks may also reduce their interest rates to attract more customers. Also, loan applications for customers of commercial banks may become easier. It increases the demand for home loans and other loans. While the customers find financial aid at a lower interest rate, the banks profit through it. This leads to the economical bloom due to a rushed money flow because the cost of funds goes down. 

Impact on bank deposit rates: Apart from the interest rates on loans, banks also adjust the interest rate on fixed deposits or savings accounts as per the Repo Rate. RR is a crucial benchmark according to which the banks set up all kinds of rates.

Also Read - LRD Loans

Banks borrow loans from RBI by pledging their securities and then repurchase them the following day. For banks undergoing a cash crunch, the loan is an overnight fund. Although the loan at Repo Rate is usually for 1 day, banks may require it for more than a day. The one-day loan is called Overnight Repo while above that is a Term Repo. Term Repo is also known as a Variable Rate Term Repo. RBI generally announces auction for Term Repo as it can be fixed for 7, 14, or 28 days. When the inflation is higher than the RBI’s standards, it hikes the current Repo Rate of RBI to check it. RBI raises the RR to infuse liquidity in the economy with a lower cost of funds for borrowers.

Additional Info: Also Apply for Home Construction Loan

Bank Rate and Repo Rate, both are powerful tools for RBI to keep a check on money flow and economic activities in the market. However, the main difference between the two is marked by the pledge of government securities to RBI for a loan.

Here are the main differences between the two:

• Commercial banks and other financial institutions borrow money at Bank Rate without any security, whereas securities serve as collateral for loans in Repo Rate.
• Usually, the Bank Rate is higher than the Repo Rate as in the case of the Bank Rate, the RBI provides loans to the banks without security.
• Usually, the loans at Bank Rate are lent for longer-term, whereas when lent at Repo Rate it is meant for the short term. 
• Changes in either of these rates may impact the commercial banks’ customers. However, the Bank Rate influences the rates on loans directly. Changing the loan interest rates by banks may take time subject to Repo Rate change. That is because it’s for a shorter duration. RR usually affects the big-ticket loans, such as home loans.

Additional Info: Also check How to Apply for Pradhan Mantri Awas Yojana

During a high inflation, RBI makes strong efforts to bring down the money flow in the economy and one way to do this is by hiking the repo rate. This increase in RR makes borrowing a costly affair for businesses and industries, and slows down investment and money supply in the market.

Additional Info: Also check Rs. 35 Lakh Home Loan EMI

Reverse Repo Rate (RRR) is a mechanism of absorbing the liquidity in the market and restricting the borrowing power of investors. RRR the rate at which the RBI borrows funds from commercial banks when required. This happens when there is excess liquidity in the market. The banks then benefit out of it by getting interest for their holdings with RBI. The reverse repo rate today is 3.35%.

Additional Info: Also check DDA Housing Scheme 2022