what is repo-rate?
It is the interest rate at which the reserve bank of India gives loan to other banks. It is also called as repurchase rate.
But why does other banks need money?
We deposit all the our money in the bank.
Bank gives this money to businesses, to individuals etc. and earn profit out of it.
What if one of the depositor comes back and asks for money ? or Some businessman comes and asks for loan?
Now the Bank takes loan from Reserve Bank of India(RBI).
RBI charges certain interest on this amount . This interest is called as REPO-RATE.
Bank tries to give more and more loan to businesses and individuals.
If RBI charges 7% interest to bank then bank charges more interest to its customers. Let us assume bank charges 10 % to its customers and makes profit of 3%.
How does REPO-RATE affect me?
If RBI increases repo-rate then bank will also increase its lending rate to maintain its profitability.
So businesses and individuals will get loans at higher interest rates.
So businesses can not expand their factories etc. and individuals who like to buy homes will also suffer from higher EMIs. So they postpone their decisions to buy home.
As we can not increase supply of goods and services, they will become costlier to buy.
Because of this, demand of goods will decrease and price will also fall.
This will bring down the inflation.
Thus RBI uses repo-rate as a tool to control inflation
Nice one...well explained
ReplyDeletethanx
DeleteSo high repo rate increases EMI but it also brings down prices and inflation. Is it good or bad for us?
ReplyDeleteGood question .....
DeleteAnswer is bit tricky.....
RBI uses Repo rate as & when required..
When Economy was going through recession after 2008 financial crisis RBI reduced repo rate and made credit very cheap so that businesses can expand , create employment etc..
But It made inflation to go up in 2014 upto 10%.
You might have seen housing prices, food prices and prices of other commodities went up in 2013 & 2014
So governor of RBI increased the repo rate to cool down inflation.
After almost 1 year, inflation was on its track . WPI was negative for some weeks.
But this comes at some price...
As credit becomes costlier, businesses can not expand and create employment.
As you can see current situation, there are not plenty of job opportunities outside . People can not switch their jobs easily. college graduates do not find recruitment happening in their campus.
So RBI has to fine tune its repo rate to balance inflation as well as growth of the economy. This not an easy job.
I hope, I answered your question.