Quantitative tools of credit control – Repo rate

“Repo rate or Repurchase rate is the rate at which commercial banks borrow money from the central bank for a short period by selling their securities to the central bank with an agreement to repurchase them at a future date at a predetermined price, with an interest at a rate of repo”..

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.

If the central bank of India – the RBI- wants to put more money into circulation, then the RBI will lower the repo rate.

Lower repo rate means the cost of short term money is low ie commercial banks get money at a cheaper rate. [therefore they can receive cash against their holdings of government securities].

This acts as an incentive for the commercial banks to borrow money from the central bank.

This ultimately increases the money supply in the economy and thus helps in controlling recession.

Therefore the economy’s growth may get enhanced.

If the central bank of India – the RBI- wants to reduce money into circulation, then the RBI will increase the repo rate.

Higher repo rate means the cost of short term money is high ie commercial banks get money at a higher rate. [therefore they maintain holdings of government securities in exchange for cash payment to the central bank]

This acts as an disincentive for the commercial banks to borrow money from the central bank.

This ultimately reduces the money supply in the economy and thus helps in controlling inflation.

Therefore the economy’s growth may slow down.

Posted in General Economics