Sunday, 8 January 2017

Repo rate Vs Reverse repo rate

Repo rate

 Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility

πŸ“— Repo rate is the rate at which the Central bank of India grants loan to the commercial banks for a short period against government securities.
πŸ“— The Repo Rate is always higher than the Reverse Repo Rate.
πŸ“— The Repo rate is a monetary tool used by the central bank for controlling the Inflation 
πŸ“— Repo Rate is charged on Repurchase Agreement
πŸ“—Repo rate is overnight / short term rate . While RBI sells money to banking system , this rate will be charged to commercial banks . Bank get money on collaterals of repo permitted bonds . These repo bonds will be given back to banks on maturity while RBI get backs it's money as per Repo terms. Repo rate is policy rate of RBI.

πŸ“—The Bank Rate is the rate at which the Central Bank discounts the bills of commercial banks.
πŸ“—In bank rate there is no need for collateral security.
 

Reverse Repo rate

Repo rate is the rate at which our banks borrow rupees from RBI. This facility is for short term measure and to fill gaps between demand and supply of money in a bank. when a bank is short of funds they they borrow from bank at repo rate and if bank has a surplus fund then the deposit the funds with RBI and earn at Reverse repo rate
πŸ“™ Reverse repo rate is the rate at which the commercial banks grant loan to the Central Bank of India.
πŸ“™ Central bank uses reverse Repo Rate for controlling the supply of money in the economy.
πŸ“™ Reverse Repo Rate is charged on Reverse Repurchase Agreement.
πŸ“™ With the increase in the rate, the flow of money in the economy decreases as the banks will now invest its money with RBI due to safety and lucrative interest rates.

 Bank rate

Bank rate is long term rate . This will be greater than repo rate ( by 1% as per prevailing rule ) and equal to marginal standing rate . Bank rates are applied in following scenarios .

  1. While government get loan from RBI
  2. While SLR / CRR not maintained by banks , RBI levy penal charges on bank with respect to bank rate .
  3. Corporations get debt by means of commercial paper . Debts get discounted eventually with the aid of bank rate ( RBI fixed rate not commercial bank rate ).
Bank rate is the rate at which RBI lends money to commercial banks without selling or buying any security.This is generally a last resort method and hence no collateral is required.Resorting to the same example as above,what if I didn’t have a toy with me currently and still needed the money?So my friend still lends me the cash but now demands a higher interest to compensate for the higher risk as he has no collateral with him!
Generally the bank rate is 100 basis points above the repo rate.Similarly the repo rate is 100 basis points above the reverse repo rate.This isn’t a rule,but is generally the case.
The other differences include that the Repos are generally for short term period while the money is borrowed at the bank rate for a longer period of time.The bank rate is always higher than the repo rate in the country.
The repo rate and the reverse repo rate are important tools for controlling inflation in the country.

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