What is repo and reverse repo auction?

Dear members,


What is repo and reverse repo auction? Recently, RBI has increased the rate by 25 bps(I heard it from the media). Some of the people in the broker office said it is negative for the market. Can anyone help me about how it affects the market?

would request to use the I require help thread to popst all questions instead of making new threads for each...

About your question maybe someone can help, I just have a faint knowledge of the same, not qualified to answer you

Here... see attachment which I compiled thanks to Google. The challenge was in finding writeups which were comprehensive as well as basic. (Also gave me a chance to brush up my rusty banking concepts)

As to your question abt the latest move being negative for the market, it probably is to some extent since some liquidity will be sucked out from the system, raising interest costs. Select Banks could however benefit as lending rates (and interest spreads) will tend to rise marginally.

Welcome others' views

AGILENT

Rising interest rates have an effect in strengthening the currency as well and reducing inflation.
Thus it works both ways.

regards
m

Hello guys. Actually i would like to know more about it. could you please tell me some more. It could be great help for me and my team as well.

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Ashley

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We are explaining the different rates in monetary policy used by RBI

Repo (Repurchase) Rate

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.

If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate

This is the exact opposite of repo rate.

The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system

If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk)

Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.


REPO AND REVERSE REPO ARE AGAINST GOVERNMENT SECURITIES OR MONEY MARKET INSTRUMENTS & BANK RATE LENDING ARE NOT AGAINST SECURITIES


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.