In this article I will be writing about the RBI’s actions on few key interest rates changes and the impact on the rate hikes. Last month RBI has increased the CRR rates by 75 points. After that within a month, last friday RBI has announced the immediate rate hikes on the key rates repo and reverse-repo. This article explains the meaning of that rates and how it will impact the market in the future. These rate changes are intending to curb the inflation. If you like this article, please subscribe to our future articles here.
What is Repo and Reverse-Repo Interest Rates?
These two rates are frequently used by the finance industry. Many of us not aware of the exact meaning and why they have to increase the rates.
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.
The bank raised the benchmark repo rate to 5 percent and raised the reverse repo rate to 3.5 percent, with immediate effect.
Impact on Rate Hikes
There is clear message that the bank loans will be more expensive in the coming months. The recent move from the RBI reduced the ease of liquidity in banking system, it will make borrowing money is costly. We can expect the loans interest rates hike in the next few months. Banks will increase the FD rates to get money from the public.
I hope this article will be useful to understand the concept of these two important rates. If you have any doubts, please post it in the comments section.