ASSIGNMENT

Repo Rate & Reverse Repo


Rate

SUBMITTED TO: SUBMITTED BY:

 What is Repo Rate ?

Repo or repurchase option is a means of
short-term borrowing, wherein banks sell
approved government securities to RBI and
get funds in exchange.
In other words, in a repo transaction, RBI
repurchases government securities from
banks, depending on the level of money
supply it decides to maintain in the country's
monetary system.
 PURPOSE OF REPO RATE

 Repo rate is an important tool used by the RBI
to control the supply of money in the banking
system. If the rate is increased, the banks will
find it difficult to borrow from RBI and the cost
of fund will increase.
 This will result in an increase in interest rate in
the system. By reducing the Repo rate RBI can
reduce the cost of borrowing and there by the
interest rate in the system

WHAT IS REVERSE REPO RATE?

Reverse Repo
rate is the rate at which the RBI borrows mon
ey from commercial banks. Banks are always
happy to lend money to the RBI since their
money are in safe hands with a good interest
.
An increase in reverse repo rate can prompt
banks to park more funds with the RBI to ear
n higher returns on idle cash. It is also a tool
which can be used by the RBI to drain excess
 PURPOSE OF REVERSE REPO
RATERATE

RBI uses Reverse Repo Rate to control
liquidity in the system.
If RBI increases the Reverse Repo rate, it indi
cates its readiness to accept money
at a higher rate.
Cash rich banks will use this facility to park
their surplus money with RBI.
 What way a common man is
affected by these rates?

The banks will decide the interest rates
based on their cost of funds. Repo Rate
will affect the rate of interest charged by
banks on various loans like Home Loan,
Personal Loan, car loan etc. As customers
of various loans, all of us will be affected
by these rates indirectly.
What way Repo rate and Reverse
Repo Rate is Connected?

As per the current practice, the
Reverse Repo Rate is maintained at
100 basis points lower than the Repo
Rate. It simply means, if any bank
want to borrow from RBI, it will pay
100 basis point more than what it
will get, while parking their money
with RBI.
Why Repo Rate is always higher
than Reverse Repo Rate?

Repo rate is always higher than Reverse Repo
Rate, otherwise it will give an opportunity of
arbitrage.
Example: Here we are assuming that Reverse
Repo Rate(8%) is higher than Repo
Rate(7%).Suppose ABF Bank has Rs. 100 in
system, it will park all the money with RBI
and will borrow the same amount from RBI
at a lower interest rate. So the bank will earn
an extra 1% of interest without any risk,
which we call as arbitrage.
Who decides the Repo Rate and
Reverse Repo Rate?

The Reserve Bank of India (RBI) will
be declaring the above rates, after
studying the needs of the market and
the future trends. These rates are the
most important tools in the hands of
RBI to control liquidity of money in
the system.
Thank You
Presented by:-

NANDANI SHARMA