Repo Rate

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This is the rate at which RBI advances short term funds to the commercial banks. They issue credit instruments called repurchase obligations. These instruments incorporate a specific date on which they would be purchased back by the issuing bank. The repos are purchased by RBI which means, RBI puts that much money at the disposal of the commercial banks. The rate charged on the repos is called the Repo rate.

 

A rise in the repo rate means that the commercial banks have to pay higher rates of interest to RBI. Consequently they have to charge higher rates of interest to their customers. The cost of money is raised. The demand for money falls and the amount of money flowing from the RBI to the commercial banks and thereafter from the commercial banks to the public is reduced.

 

In feb 2001 the Repo rate was 10%. It as reduced in the subsequent period which was a period of recession in india. It was lowered to 6.25 % in nov ’05, Since then it has been continuously increased. It was also raised to 8.5 % from 8 % on 5th July ‘08 subsequently it was increased to 9% on 29th July ’08.

 

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