• Repo Rate vs Reverse Repo Rate

    The Reserve Bank of India (RBI), has on 1 August 2018, revised its repo rate to 6.50%. There has been an increase in the repo rate by 25 basis points over the previous repo rate of 6.25%. This is the second rate hike by the RBI after the last rate hike in the previous policy review. There has been a gap of almost 4 and a ½ years in the revision of repo rates. The reverse repo rate was also hiked by 25 basis points and at the moment, stands at 6.25%.

    Difference between Repo Rate and Reverse Repo Rate

    The terms “Repo Rate” and “Reverse Repo Rate” are often used in the banking sector. Repo rate is the interest charged by the RBI while repurchasing securities sold by commercial banks while reverse repo rate is the interest rate offered by the RBI to commercial banks depositing their excess funds in the central bank.

    Repo Rate

    When a commercial bank goes through financial crisis, they approach RBI. The interest at which banks borrow funds from RBI by selling their securities and bonds is called “Repo Rate”. In other words, it is simply the rate at which the central bank of India lends funds to commercial banks when they are facing a financial crunch and are unable to take care of their expenses. In this case, a repurchasing agreement is signed by both the parties stating that the securities will be repurchased on a given date at a predetermined price. For example: If the repo rate fixed by the RBI is 10% p.a and the amount borrowed by a bank from RBI is Rs 10,000, the interest rate to be paid by the bank to RBI is Rs 1,000. Repo rate in India is fixed and monitored by India’s central banking institution, the Reserve Bank of India. It proves beneficial for short-term financial crisis. It is one of the powerful tools used by the central bank to control liquidity, money supply and inflation level in the country. If the economy needs less money supply, RBI increases the repo rate, making it difficult for banks to borrow funds. Likewise, to pump funds into the system, the central bank may reduce the repo rate, encouraging banks to borrow funds.

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    Reverse Repo Rate

    Once you have understood the meaning of repo rate, reverse repo rate is self-explanatory. It is the interest rate offered by RBI to banks who deposit into its treasury. Simply put, when banks generate excess funds, they choose to deposit it with RBI which is safer than lending it to their account holders or other companies. The rate of interest earned by the depositing bank is called reverse repo rate. For example: If the reverse repo rate fixed by RBI is 5% p.a and the amount deposited by commercial banks into RBI’s account is Rs. 10,000, the interest rate by the depositing bank is Rs 500 p.a.

    Reverse repo rate is a monetary policy instrument used by the RBI to control the supply of money in the nation. Also, there are chances when RBI falls short of money and asks the commercial banks to pitch in and offer them excellent reverse repo rates. It creates an opportunity for commercial banks and other leading financial institutions to make profits within a short period of time.

    5 Major differences between Repo Rate and Reverse Repo Rate

    • Repo rate is charged by RBI when commercial banks sell their securities. Whereas, reverse repo rate is the rate at which RBI borrows money from banks within the country.
    • While high repo rate drains excess liquidity from the market as the banks have to pay high interest to obtain loan from RBI, high reverse repo rate injects liquidity into the economic system by offering high profits to banks.
    • The repo rate is always higher than the reverse repo rate.
    • While repo rate is used to control inflation, reverse repo rate is used to control money supply in the market.
    • The main objective of repo rate is to deal with deficiency of funds. Whereas, reverse repo rate deals with liquidity in the economy.
    • Repo Rate involves selling securities to RBI with a motive to repurchase it in the future at a fixed rate of interest but reverse repo rate is mere transferring of funds from one bank account to RBI account.

    To conclude, repo rate and reverse repo rate are two opposite terms used in the banking sector. The major difference between these two are that increase in repo rate will make commercial banks borrow less and therefore pumps less money into the system, while increase in reverse repo rate will allow commercial banks to transfer more funds to RBI which will eventually contribute to the supply of money in the country.

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    • MCLR increased by 5 bps across tenures by Bank of Baroda

      Bank of Baroda has now increased the marginal costs of funds based lending rates by 5 basis points across various tenures. The decision comes after a similar move was made by the State Bank of India and ICICI Bank, two of the bigger rivals of the bank. The one-year MCLR of Bank of Baroda will now be at 8.55 percent. The MCLR for the different tenures ranges between 8.05 percent and 8.4 percent. The new rates will be effective starting from 07 September. Earlier this month, State Bank of India raised the one year MCR by 20 bps in September. The one year marginal cost of funds based lending rates now stands at 8.45 percent. ICICI Bank also increased the rate by 15 bps, with the MCLR now standing at 8.55 percent. The constant rate increase is to cope up with the increasing cost of funds and the non-performing assets of the banks.

      12 September 2018

    • Government to have talks with RBI to leave capital with banks

      The government is all set to have talks with the Reserve Bank of India to relax capital norms that are in place for banks and help bring them in line with much less stringent Basel III guidelines. The move is expected to free up around Rs.60,000 crore of capital for the state owned lenders. This will help them step-up the lending operations in order to provide a much needed boost to revive the economy and also reduce the pressure on the government to provide capital and improve the condition of weaker banks. The money that the banks need to set aside as prescribed by the Reserve Bank of India now stands at 5.5% according to the Tier-I ratio. This will come down to 4.5% under the Basel III norms. By taking this move and freeing up some capital, it is expected that about Rs.6 lakh crore worth of lending can be achieved without the additional need for provisioning. The losses incurred in the last year combined with the expected high losses in the current fiscal along with the recall of additional tier-1 instruments, it is expected that the Rs.2.1 lakh recapitalisation programme announced in october last year might be insufficient to meet the capital requirements.

      9 August 2018

    • Banks put in a sport due to RBI regulations on auditors

      Many banks have approached the PwC and other firms seeking clarity on the implications of the clause that could stop audit firms who were accused for irregularities from servicing financial situations. The central bank recently introduced a framework for statutory auditors and the possible actions that can be taken against these audit firms in case there is a time lapse.

      12 July 2018

    • Bank of China gets RBI approval to set up branch in India

      Bank of India have been issued a license to set up a branch in India by the Reserve Bank of India. This move comes after the Prime Minister of India made a commitment to the Chinese President to set up Bank of China branches in India in the SCO summit held recently. Both the countries have been keen on improving and expanding their economic ties despite both parties having disagreements on certain issues.

      6 July 2018

    • Lending rates hiked by 10 basis points by Punjab National Bank

      Punjab National Bank has raised the marginal cost of funds-based lending rates by 10 basis points. This hike will be for select tenors and will be ranging from 0.05 - 0.10 percent. The revised rates will be implemented starting 01 July 2018. Loans with a 6 month tenor will increase by 0.10 percent to 8.40 percent. Borrowing rates for loans with tenors longer than a year will increase by 0.05 percent and will now range between 8.45 percent and 8.75 percent depending on the length of the tenor.

      2 July 2018

    • Effective monetary tools used by RBI for liquidity management

      RBI has raised its policy repo rate to 6.25% by 25 basis points recently. In fact, this is the first time in the past 4 years that RBI has hiked the interest rate. Just like the policy repo rate RBI has some other effective monetary tools at its disposal to retain liquidity in the banking system. Here are the details of the key RBI monetary tools:

      Cash Reserve Ratio - Cash Reserve Ratio (CRR) is referred to the portion of cash deposits that banks hold with the RBI. When the CRR is reduced banks have more money in deposit, whereas when the CRR is increased banks have lesser amount to invest.

      Statutory Liquidity Ratio - The percentage of deposits that banks invest in government securities with the RBI is termed as the Statutory Liquidity Ratio (SLR). At present, the SLR is 19.5% which means for a deposit of Rs.100 received from a customer, the banks have to contribute 19.5% in government securities.

      Repo Rate - The fixed interest rate at which the banks can borrow money from the RBI by lending their surplus government securities is known as the Repo Rate. The more the repo rate, the costlier are the loans for the customers.

      Reverse Repo Rate - This is the rate of interest that RBI offers to the banks for borrowing their surplus funds for a short period of time. Currently, the reverse repo rate is 6%.

      26 June 2018

    • Impact of RBI’s repo rate hike

      The Reserve Bank of India’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points on Wednesday. The repo rate is essentially the short-term lending rate at which money is provided as debt to commercial banks. This is the first time the repo rate has gone up since the current government came into power. The rates were on hold since the last cut, which took place in August 2017.

      The hike in repo rate is considered to be a precautionary measure against rising commodity inflation and volatile crude prices across the world.

      The MPC’s decision was unanimous, as both Pami Dua and Ravindra Dholakia were in conformance to the same.

      RBI now expects that average inflation will be between 4.8% and 4.9% in the first 6 months of the financial year 2018-19. The rate of inflation will stand at 4.7% in the latter half of the fiscal.

      7 June 2018

    • RBI to ease pressure on short term yields

      The Reserve Bank of India (RBI) has decided to ease the rules applicable for foreign investments in government and corporate bonds. Through this revision, the central bank has also made provisions for investments to be made in shorter tenure bonds by foreign investors. According to bond market participants, this will lead to a drop in the short term rates. It could relieve the Indian rupee as well, which has already dropped by more than 4 percent this year.

      Another major change made by RBI is that foreign investors will be allowed to hold up to 30 percent of a security now, as opposed to the 20 percent which was offered earlier.

      30 April 2018

    • Growth rate of bank deposits lowest in FY2018

      According to RBI data, as on 30 March 2018, the outstanding deposits had a year-on-year growth of 6.7% at Rs.114.75 lakh crore. This is the slowest growth rate in aggregate deposits of scheduled commercial banks. The reasons behind the slow growth are the sharp increase on bank deposits following demonetisation and the low interest rates on FDs that had customers moving onto equity mutual funds. Equity markets and debt mutual funds experienced record inflows in FY2018. These two reasons justify the low bank deposit growth rate in FY2018. Now, banks have begun increasing the interest rates on bulk term deposits and retail term deposits, and have moved on to increasing their MCLR rates as well. The bank deposits are expected to grow in FY19 while equity markets and debt mutual funds are likely to witness less returns.

      18 April 2018

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