Repo rate is the first basic bank term you need to study to understand the banking sector better and also to get success in the IBPS Bank exams and interviews.
What is repo rate?
Repo rate is the interest rate charged against the money borrowed by the banks. All the banks have the provision to borrow money from the reserve bank in the times of need. This makes sure that the banks will not have to face any serious difficulties if any adversary situation arises.
Let us see with an example.Suppose the bank needs some money urgently to get the business going. They can ask for the reserve bank to provide the money, which they will give. But at the same time reserve bank will charge a rate of interest from the bank for the money given. This rate of interest is called as repo rate.
At present the repo rate is 8% and it is subject to change depending upon the economic scenario at that time. Reserve bank changes the repo rate as per their calculations regarding inflation and liquidity.
Role of RBI in changing Repo Rate
Suppose if there is too much money circulating in the banking sector (economy), RBI will be looking for ways to bring down the extra money and bring economic stability. They will now increase the repo rate which will make sure that banks will have to pay more interest rate to the RBI for the money borrowed. So eventually banks will not be happy to borrow money from RBI and soon the money circulating in the banking sector will be pulled by the reserve bank.
Similarly if there is very less money in the banking sector, RBI will definitely decrease the repo rate which will make sure that the banks can borrow money from RBI easily at cheaper rates.
Repo Rate Affecting the Bank Customers
If the repo rate goes up banks will have to pay higher rates of interest to RBI and banks will now lend money to the customers at higher interest rate. So any increase in repo rate means customers will get money at higher rates.
Similarly any decrease in repo rate will make sure that the customers will get money from the bank at cheap rates of interest
Hoping that the term Repo Rate is understood now. Please comment below if you have any doubt regarding repo rate.