Repo rate, we think we know all about it, but not enough. So, here’s us shining a light or rather charging a flamethrower on some very interesting facts about it.
We know a lot about the Reserve Bank of India (RBI). Yes, the big brother of all, the money-minter, the ‘Don Corleone’ of banking institutions in the country, or whatever hype definition that hits you first time. The RBI has been at it since 1935 and it bears the dual responsibility of maintaining price stability and economic growth at the same time. But that’s not all, it formulates, implements, and monitors our country’s monetary policy and conducts consolidated supervision of commercial banks, financial institutions, and non-banking finance firms. In short, it’s a busy body and that’s exactly why you never got to open that savings account with RBI!
Any discussion about RBI would be incomplete without the mention of repo rate. You might’ve heard it being floated around a little too often these days and the basic definition – the rate at which RBI loans money to commercial banks – might have sufficed. We bet you already knew that. But there are several other interesting lesser-known facts about RBI’s repo rate and how it influences key financial metrics within our country. Let’s get started!
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Fact #1: Repo stands for repurchase option or repurchase agreement. RBI loans out money to commercial banks in return for qualifying securities. They enter into a repurchase agreement for these securities. It usually happens when the commercial banks are struggling to maintain liquidity during volatile market conditions or when they’re simply strapped for cash.
Fact #2: Let’s go back in time a bit. Repo rate was flung into limelight when the RBI, in October 2019, mandated commercial banks to link their interest rates to an external benchmark. They had four options to choose from: the 91-day treasury bill, the 182-day treasury bill, any other benchmark interest rate produced by the Financial Benchmarks India Private Ltd (FBIL), and the repo rate. Now you know what the decision of the majority was, don’t you?
Fact #3: Since the start of the millennium, the highest recorded repo rate was 10% and it plummeted to a historical low of 4% during the recent COVID-19 outbreak. It’s a given that repo rate takes a dip when global economy goes through a rough patch. The ‘dot.com’ bubble burst during 2000-2004, global recession in 2008, and the recent COVID-19 outbreak resulted in subsequent repo rate crashes. There is a flipside to this though. As the markets stabilise, the repo rate climbs up, often a bit too sharply.
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Fact #4: After carefully considering factors such as inflation, cash liquidity, GDP growth, and more, any revision to the existing repo rate is suggested during the Monetary Policy Committee (MPC) meeting, which is held every two months. Not just the repo rate, the MPC decides upon several key monetary instruments such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Reverse Repo Rate, Liquidity Adjustment Facility (LAF), and more.
Fact #5: There’s a tit for every tat and that’s why we must talk about reverse repo rate while we’re at it. To put it simply, the reverse repo rate is the rate imposed on deposits made by commercial banks in the RBI. Most commercial banks use this strategy to secure their funds in case of a surplus. The reverse repo rate is used to control the economy’s liquidity.
Fact #6: Now, most news and articles on repo rate hikes and dips would feature this term called ‘basis points’. For the uninitiated, it is better to present it in percentage terms over basis points, but there is nothing too fussy about this. A hike of 225 basis points (that’s how much repo rate increased in 2022 alone) translates to a 2.25% increase in the repo rate.
Lastly, your loan interest rate is directly proportional to the repo rate, and your EMIs are bound to go up when repo rate increases and vice versa. So, one last piece of financial advice before you leave, in true-blue Godfather style, ‘keep your reverse repo close, but your repo closer’.