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CHANGES IN REPO & REVERSE REPO RATE IN INDIA SINCE PAST FEW YEARS
 2. What is repo rate?
Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods.
This is done by RBI buying government bonds from banks with an agreement to sell
them back at a fixed rate.
The RBI wants to make it more expensive for banks to borrow money, it increases the
repo rate.
Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo
rate
 3. What is reverse repo rate?
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks
in the short term.
Like the repo, this is done by RBI selling government bonds to banks with the
commitment to buy them back at a future date.
The banks use the reverse repo facility to deposit their short-term excess funds with the
RBI and earn interest on it.
RBI can reduce liquidity in the banking system by increasing the rate at which it borrows
from banks.
Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up
interest rates.
 4. What Does Basis Point – BPS Mean?
A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial
instrument.
The basis point is commonly used for calculating changes in interest rates,
equity indexes and the yield of a fixed-income security.
The relationship between percentage changes and basis points:
1% change = 100 basis points and 0.01% = 1 basis point. So, a bond whose yield
increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates
that have risen 1% are said to have increased by 100 basis points.
 5. Characteristics of repo rate
Overnight repos are 1 day loans;
Term repos have terms of greater than 1 day—usually weeks to months.
The firm that makes the loan for a repo, usually a bank, has a reverse repo position
which is simply the opposite side of a repo.
An open repo is a contractual relationship that allows the borrower to borrow funds up to
a certain limit, without signing a new contract—somewhat like an open credit
arrangement.
 6. Determinants of repo rate
The repo rate for a particular transaction depends on the following factors:
Credit quality: like most other securities, the interest rate varies inversely with the credit
quality of the issuer—the higher the credit quality, the lower the repo rate.
Liquidity: greater liquidity lowers trading costs and, therefore, the repo rate.
Delivery: if the collateral must be physically delivered, the lender will charge a higher
repo rate to cover its cost.
Collateral availability: if the collateral is a special issue that is hard to get, the seller of the
collateral will be able to obtain a lower repo rate from a lender that needs the collateral.
 7. Advantages of repo
Repos can provide a variety of advantages to the financial market in general & in debt
markets in particular; significantly:
Repo is a tool for funding transactions.
For institutions and corporate entities, repos provide a source of relatively inexpensive
finance.
Central banks can use repo and reverse repo as an integral part of their open market
operations with the objective of injecting/withdrawing liquidity into and from the market
and also to reduce volatility in short term in particular in call money rates.
 8. Impact of repo
Changes in repo & reverse repo rates have an impact on the following:

o Inflation
o 9. Credit channel
o 10. Interest rates
o 11. Exchange rates
 Impact on interest rates
The interest rate channel affects the demand for goods and services.
Higher interest rates normally lead to a reduction in household consumption. This
happens for several reasons.
Higher interest rates make it more attractive to save, in other words to postpone
consumption, thus lowering present consumption.
Consumption also falls because existing loans now cost more in terms of interest
payments.
 12. Impact on credit channel
The credit channel describes the way in which monetary policy affects demand via banks
and other financial institutions.
If the interest rate rises, banks choose to decrease their lending and instead buy bonds.
This means that households and companies find it more difficult to borrow money.
Companies that are either unable or unwilling to borrow must cut back their activities,
postpone investment and so on, and this dampens activity in the economy.
 13. Impact on exchange rates
The exchange rate channel describes how monetary policy affects the value of the
currency.
Normally, an increase in the repo rate leads to a strengthening of the currency.
In the short term, this is because higher interest rates make Swedish assets more
attractive than investments denominated in other currencies.
The result is a capital inflow and increased demand for kronor, which strengthens the
exchange rate.
Monetary policy also plays an important part for the exchange rate in the long term.
 14. Impact on inflation
How changes in the repo rate affect inflation
The way in which changes in the repo rate affect inflation and the rest of the economy is
known as the transmission mechanism.
The transmission mechanism is actually not one but several different mechanisms that
interact.
Some of these have a more or less direct impact on inflation while others take longer to
have an effect.
It is generally held that a change in the repo rate has its greatest impact on inflation.
 15.
 16. MOVEMENTS OF REPO & REVERSE REPO SINCE APRIL’O8
 17. REPO & REVERSE REPO IN 2009
 18. GRAPH FOR 2009
 19. Inflation in India for the year 2009
 20. REPO & REVERSE REPO IN 2010
 21. REPO & REVERSE REPO IN 2010
 22. Inflation in India for the year 2010
 23. Liquidity conditions
In the last decade the year 2010, is proving to be the worst as far as liquidity in the
banking system is concerned, the cash crunch is at its worst this time.
The banks raising money to the tune of Rs. 1.59 lakhcrore, by using the repo route is in
indicator of how bad the things are at the moment, as far as liquidity in the banking
system is concerned.
The government hasunveiled plans of injecting Rs 48,000 crore into the system.
Liquidity is expected to remain tight for the rest for the financial year despite incipient
signs pointing towards the contrary.
 The signs of easing of liquidity pressures on the market came from the reduced bank
borrowings from the Reserve Bank of India's (RBI) repurchase or repo window.
Bank borrowing from the repo window towards the calendar year-end was down to Rs
1.2 lakh crore. Bank borrowings from the repo window had hit an all-time record of Rs
1.72 lakh crore on December 22.
 24. MEASURES TAKEN BY IMF
Over the past eight years, the IMF Committee on Balance of Payments Statistics
(Committee) has taken a considerable interest in the statistical treatment of reverse
transactions. At its 2000 meeting, the Committee set up the Technical Group on Reverse
Transactions (TGRT), with the following terms of reference:
• To determine the recording practices (for transactions and positions) for repurchase
agreements and securities lending by the principals, custodians, intermediaries, and
fund managers, depending on the data sources and the information sought —
position or transactions — and whether these transactions/positions can always be
identified
• To determine what are the recording practices for a reverse repurchase
agreement/security borrowing (for the principal, the custodian, the intermediary, or
the fund manager) when a repurchase agreement then is undertaken with the same
instrument
 25. Recent update
The current repo rate is 6.25%.
The current reverse repo rate is 5.25%
At present, the RBI is planning to sell securities worth Rs.48000 crore in the coming few
months.