Saturday, September 18, 2010

Repo rates, reverse repo rates and the Inflation

Repo rate is the rate at which our 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.This increase will be transferred to the consumers in terms of interest hikes of loans in most of the instances an
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d the consumers are thus encouraged not to take loans to invest and drive the inflation to a downward curve.
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. This draining of money eventually leads to less amount of money(interest) available for the banks to provide loans and it also appears to contain the rising inflation.

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