The term “Repo rate” is commonly seen in newspapers and used by banks. Many banks link their loan interest rates to the repo rate, though this is often not the case with NBFCs, which tend to use their own benchmark rates.
The repo rate is the interest rate at which a country’s central bank (the Reserve Bank of India, in the case of India) lends money to commercial banks to address shortfalls in their funds. Monetary authorities use the repo rate to manage inflation.
When inflation rises, central banks increase the repo rate to discourage banks from borrowing from the central bank. This reduces the money supply in the economy, helping to control inflation.
Reverse Repo Rate
The reverse repo rate is the interest rate at which the Reserve Bank of India borrows money from commercial banks within the country. It serves as a monetary policy tool to regulate the money supply in the economy.
An increase in the reverse repo rate will reduce the money supply, assuming other factors remain unchanged. This is because higher reverse repo rates incentivize commercial banks to deposit their funds with the RBI, thus reducing the amount of money available in the market.
