SANJAY (CHARTERED ACCOUNTANTS) (938 Points)
07 September 2011
Dear Members,
Please clarify what is repo rate and reverse repo rate? And how it will impact on our loan interest rate. Why govt increase/decrease the repo rate and reverse repo rate..
Thanks in advance...
Sanjay Verma
Amit Gupta
(Loosening Myself)
(1508 Points)
Replied 07 September 2011
Repo:
When banks have any shortage of funds, they can borrow it from RBI or from other banks. The rate at which the RBI lends money to commercial banks is called repo rate a short term for repurchase aggrement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.. the repo rate in India is currently 8 % as of July 2011
Reverse Repo:
A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints
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