We often hear the term ‘Repo Rate’ as it an important component of the monetary policy of the nation. Repo Rate is in a lot of talks right now. Let’s first try to understand what exactly is Repo Rate and how does it impact the Indian economy.
WHAT IS THE REPO RATE?
In simple terms, the repo rate refers to a rate at which a nation’s central bank (Reserve Bank of India in India) lends money to commercial banks in case of any shortfall of funds. Repo Rate is subject to changes as per the policies of RBI. It is an important tool used by the central bank to control inflation trends and maintain liquidity in the market.
The repo rate and inflation have an inverse relationship. If the repo rate increases, inflation reduces and if the rate lowers, inflation increases.
CHANGES IN REPO RATE SINCE 2019
Here’s a snapshot of all the repo rate changes that have been done by RBI since 2019. In 2022, Repo Rate has been changed four times so far:
|7 December 2022
|30 September 2022
In 2022, The first hike was done on May 4 by 40 bps in an unscheduled policy review with the objective of controlling inflation. The RBI Governor Shaktikanta Das while announcing the decision said that the global economic recovery was losing momentum and geopolitical tension has been pushing inflation up.
On 08th June 2022, RBI announced another increase in the repo rate by 50 basis points to 4.90 per cent. The bank also decided to raise MSF Rate and Bank Rate to 5.15 per cent from 4.65 per cent.
On Aug 05, 2022, the Central Bank again increased the policy repo rate by 50 basis points to 5.4 per cent. The fourth hike has been done on 30th September 2022.
On December 07, 2022, the fifth hike by the bank led to an increase in repo rate by 35 basis points (bps).
The Current Repo Rate stands at 6.25%.
Monetary Policy Committee meeting met on 5th,6th &7th Dec, based on an assessment of macroeconomic situation & its outlook, MPC decided by a majority of 5 members out of 6 to increase policy repo rate by 35 basis points to 6.25% with immediate effect: RBI Governor Shaktikanta Das pic.twitter.com/wX40cSfduV
— ANI (@ANI) December 7, 2022
THE EFFECT OF THE REPO RATE ON THE INDIAN ECONOMY
Repo Rate is an effective tool used by the central bank to control and monitor the inflation, liquidity and money supply in the market. Any change in repo rate directly affects the cost of borrowing by banks. If the economy witnesses a rise in inflation, RBI increases the repo rate to control it. An increase in the repo rate leads to an increase in the cost of borrowing for businesses, which results in lowering the investment and cash flow in the market.
In case of a liquidity crunch in the economy, the Central Bank reduces the repo rate which leads to a reduction in the cost of borrowings and therefore increases the cash flow in the economy.
Frequently Asked Questions:
- What is the Current Repo Rate?
The current repo rate stands at 5.90% after a change of 50 basis points by RBI on 30th September 2022.
- How many times has RBI changed Repo Rate in 2022?
On 30th September 2022, RBI changed the Repo Rate fourth time to achieve the target of keeping a check on high inflation and support a depreciating rupee.
- What happens when Repo Rate increases?
An increase in Repo Rate increases the cost of borrowings which results in lowering the investment and cash flow in the market.
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