I hope you have seen the news regarding the change in Repo rates announced by our RBI governor and I understand some of you are finding it difficult to interpret what is being mentioned.I will try to explain it you with my fullest potential in simple words
Points to understand
* Repo is a financial market instrument used to manage and control short term liquidity issues with the banks
* It is in the rate at which RBI issues money to the commercial banks in the country. This is done to avoid deficiency of funds with the commercial banks
* Reverse repo rate on the other hand is the rate at which RBI borrows money from the commercial banks.
* Repo transactions are done by keeping Govt bonds or other permitted securities as collateral with an agreement to repurchase the securities upon a mutually agreed later date at an agreed price along with interest.
Once you have read the above lines let’s have a look at this now
How can RBI use the Repo rate to control deficiency or excess of cash flow in the economy?
If there is heavy inflation, RBI will be forced to increase REPO which will in turn increase the interest rates for banks to issue loans which will slow down economy helping to cut un natural inflation
Now let us say, there is very poor demand in the economy which is severely affecting the people borrowing the money and amount of investments being made in businesses. If RBI cuts down repo, this could be a motivation for people to borrow at lower interest rates from commercial banks and definitely will be a support to banks who are under liquidity crunch.
During the same time last year, our Repo rates were around 6%
After the RBI governor’s announcement today, the new repo rate is 4%
The decrease in REPO rates comes along with the financial packages announced by the FM and I see this as a measure to revive our economy with more easy access to cash flow and hence funds for businesses. There has also been an increase in the moratorium period for EMI payments by 3months till August.
Kindly Stay Safe
No of cases are rising like never before