When dealing with financial institutions, you must have come across the term repo rate. The repo rate is how the bank tends to borrow funds. The Reserve Bank of India purchases the securities of these banks at a particular rate. It is known as the repo rate. But one must be thinking what is reverse repo rate. Read this article to know about the same.
Reverse repo and its effect
The reverse repo happens to absorb the liquidity of the market. In simple terms, it restricts the buying power of the investor. For instance, the reverse repo rate occurs when the Central Bank of India tends to borrow money from the Reserve Bank of India. If the bank has the availability of excess liquidity in the market, this situation occurs. Sometimes during the period of high inflation level, the RBI tends to increase the reverse repo. It is generally done so that the bank can earn a bigger return on investment.
On the other hand, the other banks are left with lower funds for their customers and clients. Whenever the reverse repo rate hike occurs in the market, the bank offers a higher interest rate. It is done to mitigate the default risk of the bank.
How is the reverse repo rate different from the repo rate?
It happens to be one powerful aspect of the economic condition in India. It helps regulate the company's inflation levels, liquidity, and money supply. It is said that if the repo rate is higher, then the cost of borrowing soars. One can also take the help of simple interest calculation to estimate the rate of interest.
Nonetheless, the repo rate slows down the investment process while negatively affecting the country's economic growth. Due to this, one can control the problem of inflation. Hence whenever the RBI changes the reverse repo rate and repo rate, it impacts the economy greatly. Therefore this article makes clear the concept of what is reverse repo rate.
Read Also: What is The Impact of The Latest Repo Rate Hike on Your Personal Loan EMI?
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