Today the Reserve Bank of India has announced a cut in the repo rate and reverse repo rate. RBI Governor Shaktikanta Das announced this in a press conference. He said that the policy rates have been cut by 0.40 percent. That is, the repo rate which was at 4.40 percent has come down to 4 percent and the reverse repo rate which was at 3.75 percent has come down to 3.35 percent.
Question: What is repo rate and reverse repo rate?
The Reserve Bank has been continuously cutting the repo rate and reverse repo rate for a long time, so that banks have more money to lend to customers. In fact, the rate at which the RBI lends to banks for a short period is called the repo rate and the rate at which banks earn interest by keeping the amount with the RBI is called reverse repo rate.
Question: How are customers’ loans cheap and how does EMI decrease?
Due to low repo rate, if banks get loan from RBI at low interest, then the cost on their fund is reduced. They can benefit from this by making loan rates cheaper. Often when the RBI lowers the repo rate, after this, the process of reducing the loan rates of banks also starts.
Question: How do banks benefit from reducing the reverse repo rate?
After a day’s work, the amount left with the banks is left by the banks to the Reserve Bank of India. RBI pays interest to banks on this amount and the rate at which RBI gives interest to banks on this amount is called reverse repo rate. By reducing the reverse repo rate, RBI gives the message to banks that instead of keeping their money with RBI, banks give more loans to the people. Since they are getting less interest when they keep money with RBI, banks give more and more loans to the people, in which the flow of liquidity is maintained in the system.
Question: How does repo rate and reverse repo rate affect the loan of banks?
Repo rate and reverse repo rate are interlinked. On the one hand, by reducing the reverse repo rate, the RBI leaves more money with the banks, so that they can give more loans. On the other hand, by reducing the repo rate, banks provide loans at cheaper rates, which the banks can benefit their customers.
The meeting of the MPC was to be held on June 3-5, first, the
RBI governor said that the first meeting of the MPC i.e. the Monetary Policy Committee of the RBI was to be held from June 3 to 5 and after that the credit policy was going to come on June 5. However this has already been done and in the meeting held from 20 to 22 May, it was decided to reduce the repo rate and reverse repo rate. 5 out of 6 members of MPC voted in favor of the decision to reduce the repo rate and reverse repo rate.