Fri. Mar 29th, 2024
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Repo rate
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Meaning of Repo rate

Repo Rate means the rate of interest which is charged by the RBI when loans are advanced to the Commercial Banks. The RBI of India keeps on changing the rate. To maintain equilibrium in society. The demands and supplies of the economy need to be stabilized. It is also known as the repurchase rate. For a better understanding click here.

Measurement of Repo Rate

It is measured in terms of ‘Basis Points’. Often referred to as ‘bps’ or ‘Bips’. One Basis point is equal to one part of ten thousand and mathematically it is 1/10,000.

Who decides the Repo Rate

It is determined by the RBI Governor who is the head of the RBI Monetary Policy Committee. Repo rate is directly linked to the economy hence deciding the rate matters a lot. It is used to control society’s liquidity and inflation rate.

Determination of Repo Rate

The economic creditworthiness of the borrower, political, social, etc causes do have an impact on the determination of repo rate.

The implication of High and Low Repo Rate

Repo rate is one of the most significant monetary tools therefore RBI uses it to control inflation. It is directly linked with inflation. The economy faces inflation when people have money in their hands to buy goods and services. One of the severe hyperinflations took place in Germany after the First World-War, which took place in the year between 1921 to 1923. However, to understand it’s the implication we need to compare it with inflation.

The relation is higher the repo rate the inflation in the economy will come down. Similarly, if it is lowered down. Inflation after that will go up.

COVID
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COVID-19 Nationwide Lockdown

Due to the nationwide lockdown, the economy of the nation had seen a huge downfall. The economy of the nation is facing a ‘Cost-Push Inflation. In which due to the localized lockdown there is a huge fall in the aggregate supply side. The manufactures are not able to transport their goods and services to the customers.

Nationwide lockdown and relation to Inflation

The epidemic outburst in the nation had enforced a complete lockdown because of which a huge decline in demand is observed. The common people are not allowed to roam outside. As well as the Government of India had asked only essential services to operate like medical and food shops. However online e-commerce sales are increasing but even now a lot of people like to visit shops. Hence the part of the salary is saved and not used at all.

Thus because of the lockdown people do have money but a shortage in supply has created a situation like inflation.

Recent cut in Repo rate

Due to the shortage in supply and lockdown, the inflation in the economy is higher. Therefore in order to control it, the RBI cut the lending rate so the start-ups can manage their company. The direct linkage of the cut in the repo rate will help the company and the Small and Medium-sized companies to revive.

Few other monetary indices

For a better understanding, at the same time looking to a few other indices will give us a clear picture. The Consumer Price Index stood at 6.09%. Urban CPI is at 5.09% rural is at 6.20%. Retail Inflation level stood at 4% which is the upper limit of the medium-term CPI.

Further cutting Repo rate

If the rate further decreases, then it will be bad for the economy.  Too much of cash flow in the economy will take place and will hamper the equilibrium of the society. However, the MPC will go for another round of cuts. To show it’s concern towards the growth of the economy and to provide stability to the volatile market.

Therefore a further decrease by 25 basis points in repo rate and 35 basis points in reverse repo rate lies in the upcoming monetary policy review. According to the SBI Ecowerp report, a further cut by at least 100 basis points from the current level can be seen.

Conclusion

The conclusion to the further decline in the Repo rate to the market at this time is not beneficial. Already, the market is facing inflation which needs a quick response. Thus, cutting down the rate is not a solution. Other ways such as the extension of the timeline for loans. Lowering the interest rates for the people in debt might help to improve the situation.

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