Definition of reverse repo rate

Answer 1

que. what is the reverse repo rate?

ans. In India when RBI lends money from commercial banks against secuerities and the lending rate given by RBI to these bank called reverse repo rate to control supply of money and to control inflation. that is also decleared by RBI.

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Ans.

Meaning of Repo Rate - A repo or more broadly, a repurchase

agreement, is normally a contract through which a seller of

securities promises to buy them back at a later date for a

mutually agreed price. Overnight repo, term repo, reverse

repo, purchase agreement, buyback, and leaseback are some

of the other related terms used in these kinds of

operations.

Financial instruments like treasury or government bills,

treasury/government or corporate bonds, and stocks/shares

are offered as securities in a repurchase agreement.

Typically, in this agreement, a prospective seller submits

the instruments for cash, with a promise to repurchase them

from the buyer at a specified time. The sum being repaid is

always greater than the sum received at the time of

agreement. The difference amount is termed as repo rate.

A repo differs marginally from a loan transaction. While

taking a loan, the debtor places the instruments under a

lien to the lender. Physical possession of the securities

lies with the lender during the tenancy of the loan. When

the loan is fully settled, the borrower gets back the

ownership of the securities. If the debtor fails to clear

the loan, the lender can dispose of the securities to

recover the dues. If the sale value of the securities is

lesser than the total loan amount, the creditor holds the

legal right to recover the balance amount from the debtor.

In the case of a repo, the cash provider can liquidate the

securities if the seller defaults in the repurchase of the

instruments. However, the repo buyer cannot recover the

full amount, if the sale value of the securities is lesser

than the cash lent originally. This can happen if the

instruments had depreciated in value during the repo

agreement period. On the other hand, if the securities had

appreciated during that period, the buyer stands to make a

fair profit. Thus, a repo transaction carries a definite

element of risk. Normally, repos are invariably

overcollateralized to reduce the amount of risk involved.

Daily market-to-market margining is also resorted to in

repo agreements.

Bank Rate

This is the rate at which RBI lends money to other banks

(or financial institutions .

The bank rate signals the central bank's long-term outlook

on interest rates. If the bank rate moves up, long-term

interest rates also tend to move up, and vice-versa.

Banks make a profit by borrowing at a lower rate and

lending the same funds at a higher rate of interest. If the

RBI hikes the bank rate (this is currently 6 per cent), the

interest that a bank pays for borrowing money (banks borrow

money either from each other or from the RBI) increases.

It, in turn, hikes its own lending rates to ensure it

continues to make a profit.

Call Rate

Call rate is the interest rate paid by the banks for

lending and borrowing for daily fund requirement. Si nce

banks need funds on a daily basis, they lend to and borrow

from other banks according to their daily or short-term

requirements on a regular basis.

CRR

Also called the cash reserve ratio, refers to a portion of

deposits (as cash) which banks have to keep/maintain with

the RBI. This serves two purposes. It ensures that a

portion of bank deposits is totally risk-free and secondly

it enables that RBI control liquidity in the system, and

thereby, inflation by tying their hands in lending money

SLR

Besides the CRR, banks are required to invest a portion of

their deposits in government securities as a part of their

statutory liquidity ratio (SLR) requirements. What SLR does

is again restrict the bank's leverage in pumping more money

into the economy.