What is the Repo rate? What is the CRR rate? why should CRR be varied by the RBI? Read further to know more.
Reserve Bank of India may increase or decrease rates like REPO, Reverse REPO CRR, etc.
What is the REPO rate?
REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks. In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period.
The current REPO rate is 6.25% as of December 2022.
Bank gives loans to the public at a higher rate, often 1 higher than the REPO rate, at a rate known as the Bank Rate (now the bank rate will be 7.25%). RBI at times borrows from banks at a rate lower than the REPO rate, and that rate is known as the Reverse REPO rate (now 3.25%).
What is the CRR Rate?
CRR corresponds to the Cash Reserve Ratio. It corresponds to the percentage of cash each bank has to keep as cash reserve with RBI (in their current accounts) corresponding to the deposits they have. For example, say if the State Bank of India(SBI) got a total deposit of Rs. 1 crore with them, they need to keep 3 % of that as cash reserve with RBI (around 4 lakh rupees).
Need to reduce the CRR?
The problem with high CRR is that commercial banks lose a significant amount to be locked up in RBI lockers without getting any interest. Banks lose profit as they cannot spend this amount as loans to the public.
There was a debate regarding CRR between the SBI chief and RBI governor before. A .25% reduction in CRR will pump around 18000 crore rupees back to the banks, which they can use to give loans.
Why is there a fuss around the REPO rate cut?
There is a cry from the industrial sector to reduce the REPO rate by RBI as high REPO makes the loans that the corporates take to run their business costly.
Considering that our industrial and service sector was going through a troubled phase, with a low growth rate, a rate cut in REPO was in great demand.
Lowering the REPO rate means cheap loans for the public, but that also means high liquidity in the market – so it can lead to inflation – which will turn the whole act counterproductive.
Why did RBI lower the REPO and CRR?
More than the inflation easing factor, RBI has started to give priority to the growth of the Indian economy. India’s growth rate has been decreasing (now around 5%) for a couple of years, due to external and internal factors.
As India’s growth is mainly driven by private players, a high interest rate (REPO) cannot be of any help. The capital-intensive industries need cheap capital and for that, they need cheap loans.
Growth is coupled with development in many sectors – and growth not only provides better employment but more taxes too – which can be used for social sector initiatives by the government.
In news
The Monetary Policy Committee (MPC) of the Reserve Bank of India cut the repo rate to 6.25% from 6.5% (25 basis points (bps)) for the first time in 5 years (since 2020).
- After the Union Budget 2025-26 reduced personal income tax to spur consumption, this step aims to revive economic growth amid a slowdown.
- The RBI’s repo rate cut supports the government’s tax reductions by lowering borrowing costs and sustaining demand.
- The recent US tariffs on Canada, Mexico, and China sparked trade war fears, weakening the rupee to 87.29 per dollar and raising inflation risks. A repo rate cut could help cushion the impact of external shocks and support domestic growth.
Frequently Asked Questions (FAQs)
Q. What are repo and reverse rates?
Ans: The key distinction between the repo and reverse repo rates is that the repo rate earns income through lending to commercial banks, whereas the reverse repo rate earns interest on funds deposited with the Reserve Bank of India.
Q. What is the SLR rate?
Ans: SLR is calculated as a percentage of all the deposits held by the bank. Another way to define the SLR meaning is the ratio of a bank’s liquid assets to its net demand and time liabilities.
Also read: Fiscal Deficit and Current Account Deficit
Sir I think that bank rate definition mentioned above is not correct, correct me if i am wrong.
Bank Rate and Repo Rate seem to be similar terms because in both of them RBI lends to the banks. However, Repo Rate is a short-term measure and it refers to short-term loans and used for controlling the amount of money in the market. On the other hand, Bank Rate is a long-term measure and is governed by the long-term monetary policies of the RBI.
U r rt dubey g
What you said is right 😊