To help check inflation the Reserve Bank of India (RBI) took tough measure by hiking it its short term lending rate or repo rate by 0.25 per cent to 8.00 per cent from 7.75 per cent.
This new rate comes into with immediate effect. The hike in rate is likely to force banks to increase interest rates and help check inflation.
However the reverse repo rate has been kept intact at 6 per cent.
To understand the impact of the rate change it is necessary to understand what Repo rate & Reverse Repo rate means.
Repo Rate : Whenever the Indian banks have any shortage of funds they can borrow it from Reserve Bank of India (RBI). Repo rate is the rate at which Indian banks borrow rupees from RBI. 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.
Reverse Repo Rate : Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.
With the increase in Repo rate many Indian banks will now increase the lending rates. Its now a wait and watch situation in the banking sector.
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