Current Repo Rate and its Impact on the Indian Economy
The repo rate is not stable and keeps varying with the inflation rate, also modifications in these repo rates have a different impact on every sector. Some sectors observe a significant profit while some may bear huge losses. For two consecutive financial years, RBI has been cutting down the repo rates. As per the RBI, in the financial year 2022-23, this is the consecutive 5th hike and the repo rate for the current quarter of the financial year 2022-23 is 6.25%, however, the reverse repo rate is 3.35% respectively. This Repo Rate is now touched its highest level since August 2018. A decrease in the repo rate attracts huge investments and thus helps the Indian economy to grow at a rapid pace. The repo rates are varied to keep inflation in control and therefore it has a significant impact on the economy.
The Repo rate plays a crucial role in the Indian economy as the repo rate directly affects the interest rates of banks and thus when the repo rate is less the Indian economy starts growing at a rapid pace. As all the major investors start investing in new businesses as they also have to pay less interest to the bank, thus resulting in the economic growth of India. In the last financial year i.e 2021 the repo rates have significantly decreased by the RBI. Thus during this period, the economic growth of India pumped up at a significant rate.
Impact of Repo Rate and Reverse Repo Rate
Current Repo Rate is 6.25 percent (According to 12th December 2022), after increasing 35 basis points (bps). The repo rate is sometimes referred to as Repurchasing agreement rate or repurchasing order rate; which is the rate of interest that commercial banks need to pay to the Reserve Bank of India on the borrowed amount. While borrowing a significant amount from the RBI, commercial banks need to sell their securities to the RBI to ensure fund security in case of a shortfall of funds and maintain liquidity. The Repo rate plays an important role in the economic growth of the nation and has a huge impact on inflation as well thus RBI uses it as its main tool to control inflation.
While on the other hand, the reverse repo rate is contrary to the Repo rate, and commercial banks receive handsome interest on their deposited funds from the RBI. Thus the rate of interest paid by the RBI to the commercial banks for their funds is referred to as the reverse repo rate. For example if a bank borrows a sum of Rs 500 crores from RBI at a rate of 4% then after 1 year, the bank will need to repay Rs. 520 crores.