What is repo rate and reverse repo rate and how does it work?
What is repo rate and reverse repo rate?
Can you please explain the concept of repo rate and how it contributes to managing the Indian economy?
"Understanding Repo Rate and Reverse Repo Rate: Their Impact on the Indian Economy"
HEY kinjal,
I would like to explain this in very simple way
REPO RATE is the rate at which commercial bank borrow money from RBI
REVERSE REPO RATE is the rate at which RBI borrow money from Commercial bank
These both plays a crucial role in managing our Economy
lets move in details to know how does it work -:
Monetary Policy Tool: The RBI uses the repo rate as a tool to control the money supply in the economy. By raising or lowering the repo rate, the RBI can influence the borrowing and lending activities of banks, thereby impacting the overall functioning of our economy.
WHEN MONEY SUPPLY IS INCREASED??
In case of Deflation
When the purchasing power decreases, indicating that individuals have less money, the demand will be reduced. Consequently, our economy experiences deflation. At this juncture, the money supply is increased by decreasing the repo rate.
To counter deflation and boost economic activity, central banks like the Reserve Bank of India (RBI) can take measures to increase the money supply. One common way to do this is by lowering the repo rate.
Lowering the repo rate makes borrowing cheaper for banks. When banks can borrow money at a lower cost, they are more likely to lend it to consumers and businesses at lower interest rates
WHEN MONEY SUPPLY IS DECREASED??
In case of Inflation
When there is an increase in purchasing power, indicating that individuals have more money, there will be a corresponding rise in demand. Consequently, our economy experiences inflation. At this juncture, the money supply is reduced by raising the repo rate.
Decreasing Money Supply:
To combat inflation, the central bank, like the Reserve Bank of India (RBI), may use tools to reduce the money supply. One common method is increasing the repo rate or policy interest rates.
When the central bank raises the repo rate, borrowing money becomes more expensive for banks. This, in turn, leads to higher lending rates for consumers and businesses.
In summary, when the economy is in a deflationary phase with low demand and decreased purchasing power, increasing the money supply by lowering the repo rate is a common monetary policy tool used to stimulate economic activity. It encourages borrowing and spending, which can help counter deflation and support economic growth. However, central banks must carefully manage the money supply to maintain a balance between inflation and deflation, as excessive money supply growth can lead to inflationary pressures.
