WHAT IS REPO RATE TERMS IN BANKING ?
Repo rate refers to that rate of interest at which the banks borrow for short term period from the RBI. In India it is for up to 90 days. If the repo rate is increased, it becomes costlier for the banks to borrow. Hence, while providing loans to the consumers the banks start charging a higher rate of interest. This discourages the consumers from borrowing and demand falls down. This brings down the inflation. On the other hand if the repo rate is reduced, it becomes cheaper for the banks to borrow. Hence, the banks
charge a lower rate of interest while providing loans to the general consumers. This leads to increase in demand and economic growth is witnessed.
The entire mechanism of Repo Rate is classified into two parts
(A) Overnight Repo (B) Term Repo.
Under Overnight Repo, the banks may borrow only for up to 24 hours. However under this a bank can borrow a maximum amount which is not more than 0.25 % of its NDTL.
On the other hand, Term Repo in India may have a maturity period of 7 days, 14 days, 21 days
and so on but not more than 90 days. Through this a bank can borrow up to 0.75 % of its total
deposits (NDTL).
The word REPO stands for Repurchase Operation / Option. Under this mechanism when a bank borrows from the RBI it has to pledge securities with the RBI. These securities are placed with a promise that the banks will repurchase them at a fixed rate of interest on a fixed date. That is why it is known as Repo Rate. However, the value of securities placed should be at least 105% of the amount being borrowed. These securities which are being placed cannot be a part of the SLR of that Bank.
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