Repo Rate

What is Repo Rate?

It is a significant monetary tool used by the central bank to counter inflation and maintain demand & supply of money, Interest Rate at which countries central bank lends money to their commercial bank is known as repo rate. In other terms, we can also say that the rate at which some borrow someone else’s money. Every country has their own term for Repo rate as in US Repo rate is known as Fed Rate.

Countries which are developed and have high credit rating their lending rate is low as compare to the countries which are developing and have a low credit rating. This is done to attract more and more investment in the country, this also helps to increase FDI and FII generate more cash flow to reduce the balance of payment gap. 

What Happen When the Repo Rate decreases?

According to the recent statement by RBI current Repo Rate is at 6.25%, as RBI decided to cut it by .25 basis, it was the first cut since August 2017. It will help to increase cash flow in the country, as industries and companies will be able to take loan from banks at a lesser rate as compared to earlier, Normal consumer will able to buy more goods and services, will able to buy home, cars as they have to pay less interest on their loans, business will able to expand and grow at cheaper rates, their will high demand for loans that will also generate higher cash flow for the banks. It will also boost FDI&FII in the countries as more companies will come to India and start their business as corporate borrowings will be cheap and it will provide a needed boost to new companies that will be entering the India market.

Another side of lower Repo Rate

As there will be an increase in the money supply in the country, it will result in high demand for goods and services. In the longer term, it might result in higher inflation. Higher inflation put a negative impact on the value of the currency. 

Many new companies will take loans and expand their business will higher more people but if their plans don’t work than there is a high possibility they will not able to pay back loans and which may result in bigger NPA crisis. It may provide a short-term boost to the economy but it may also bring bigger and unsolvable problems. It very important for the central bank of a country to develop a balanced monetary policy and maintain steady demand & supply of money.