Posted in General Studies 3, Indian Economy

Repos and Reverse Repos

Read it later

updated on May 12th, 2019

Repos and Reverse Repos

  • Repos and Reverse Repos: In the era of economic reforms there developed two new instruments of money market— repo and reverse repo. Considered the most dynamic instruments of the Indian money market they have emerged the most favoured route to raise short-term funds in India.

Repo

  • ‘Repo’ is basically an acronym of the rate of repurchase. The RBI in a span of four years introduced these instruments—repo in December 1992 and reverse repo in November 1996.
  • Repo allows the banks and other financial institutions to borrow money from the RBI for short-term (by selling government securities to the RBI).
  • Repo rate is also Known as treasury bill rate

Reverse Repo

  • In reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions). All government securities are dated and the interest for the repo or reverse repo transactions are announced by the RBI from time to time. The provision of the repo and the reverse repo have been able to serve the liquidity evenness in the economy as the banks are able to get the required amount of funds out of it, and they can park surplus idle funds through it. These instruments have emerged as important tools in the management of the monetary and credit policy in recent years.

Accepting the recommendations of the Urjit Patel Committee, the RBI in April 2014 (while announcing the first Bi-monthly Credit & Monetary Policy-2014–15) announced to introduce term repo and term reverse repo. This is believed to bring in higher stability and better signaling of interest rates across different loan markets in the economy.

In News

SBI is linking Repo rate with the saving bank accounts

  • SBI is India’s largest bank with almost quarter of baking business under it .
  • The bank has linked savings bank deposits with balances of more that Rs 1 lakh to the repo rate, changing from the practice of linking to the Marginal Cost of Funds based Lending Rate (MCLR).
  • The repo rate — the interest rate at which the RBI lends funds to banks — is currently 6%.(May 2019)
  • As per SBI’s formula, the new rate for savings bank deposits above Rs 1 lakh and up to Rs 1 crore will be 2.75% below the current repo rate — which works out to 3.25% per annum, as against the 3.5% offered so far.
  • For savings bank deposits above Rs 1 crore, the new rate will be 3.75%, down from the earlier rate of 4%.

What are the advantages and disadvantages of linking the saving accounts to Repo Rate ?

Aadvantage

  • transparency

Disadvantage

  • After linking with the external repo rate the small banks might not control their losses .

PS : How to prepare Indian Economy for UPSC ?

Help us by contributing and making this site better by commenting below or mailing us at discussanswer@gmail.com . You can send us articles and suggestions .

Read it later

Leave a Reply

Your email address will not be published.