Repo rate is the interest rate at which the central bank lends money to other banks stands at 7.50% whereas reverse repo rate is the rate at which the central bank borrows form other banks has been increased to 6.50%.
A question that arises in an inquisitive mind is that, why there is a difference between the two rates and what does the difference signify?
The difference between the two is 1%. Repo rate which is higher than the reverse repo rate tells us that, now, the central bank wants to lend money to banks on a higher interest rate because it wants the rate of inflation to be equal to its stipulated target at 6%. And, the reverse repo rate shows that the central bank wants to borrow at a lower rate than repo rate. Everytime when inflation is a concern the central bank has mainly manipulated repo rate and reverse repo rate because the banks wants to signal other banks about the condition of the economy regarding the inflation and unemployment scenarios. If inflation is high it increases both the rates and when unemployment is high it somewhat decreases them given the level of inflation. Reserve bank of India is a bank of last resort which always maintains a ratio of funds depending on the need of the economy under various heads. When repo rate is increased it means that the bank wants to decrease the flow of money/finance to the economy and when it increases reverse repo rate it means it wants to increase the availability of finance for the central bank’s use for lending. The central bank is the lender of the government; therefore, an increase in reverse repo rate means the central bank wants to lend to the government at a lower rate than the repo rate. A higher repo rate means that the central does not want other banks to finance the private needs of the economy or financing but at a higher rate. When repo rate is increased it decreases the availability of finance for private use whereas an increase in repo rate shows that the central bank also wants decrease finance for public use. Therefore, we can conclude that the overall condition of the economy does not support the idea of expenditure, public or private, at all.
However, the natural rate of inflation and unemployment for developed economies is 5% and since India is a developing economy therefore the central bank has set higher inflation rate at 6% for the economy. Inflation is nothing but the rate of increase in money supply to finance the needs of the economy, public and private.
When the central bank increases repo rate it means it wants to lend to other banks at higher interest and when it increases reverse repo rate it means it does not wants to borrow and when it increases or decreases them simultaneously it means it wants to keep the situation somewhat intact. The message is clear that the central bank wants to keep the level of inflation constant if it can not decrease it to its target at 6%.
Moreover, the difference between the two i.e. 1% also tells us that the banks should follow the central bank to keep the difference between the deposit rate and lending rate equal to 1%. However, it remains a dilemma whether whom the central bank discourage and whom to encourage to take loans government or private investors?
However, the rate of increase in home loans is around 17% which is equal to our natural growth rate or rate of growth population at 17%. The only growth rate compatible to our growth models that say actual growth rate must equal the natural growth rate. Natural growth rate is the rate of growth of population, and, since, everybody wants to own a house it seems logical and understandable, too…
A question that arises in an inquisitive mind is that, why there is a difference between the two rates and what does the difference signify?
The difference between the two is 1%. Repo rate which is higher than the reverse repo rate tells us that, now, the central bank wants to lend money to banks on a higher interest rate because it wants the rate of inflation to be equal to its stipulated target at 6%. And, the reverse repo rate shows that the central bank wants to borrow at a lower rate than repo rate. Everytime when inflation is a concern the central bank has mainly manipulated repo rate and reverse repo rate because the banks wants to signal other banks about the condition of the economy regarding the inflation and unemployment scenarios. If inflation is high it increases both the rates and when unemployment is high it somewhat decreases them given the level of inflation. Reserve bank of India is a bank of last resort which always maintains a ratio of funds depending on the need of the economy under various heads. When repo rate is increased it means that the bank wants to decrease the flow of money/finance to the economy and when it increases reverse repo rate it means it wants to increase the availability of finance for the central bank’s use for lending. The central bank is the lender of the government; therefore, an increase in reverse repo rate means the central bank wants to lend to the government at a lower rate than the repo rate. A higher repo rate means that the central does not want other banks to finance the private needs of the economy or financing but at a higher rate. When repo rate is increased it decreases the availability of finance for private use whereas an increase in repo rate shows that the central bank also wants decrease finance for public use. Therefore, we can conclude that the overall condition of the economy does not support the idea of expenditure, public or private, at all.
However, the natural rate of inflation and unemployment for developed economies is 5% and since India is a developing economy therefore the central bank has set higher inflation rate at 6% for the economy. Inflation is nothing but the rate of increase in money supply to finance the needs of the economy, public and private.
When the central bank increases repo rate it means it wants to lend to other banks at higher interest and when it increases reverse repo rate it means it does not wants to borrow and when it increases or decreases them simultaneously it means it wants to keep the situation somewhat intact. The message is clear that the central bank wants to keep the level of inflation constant if it can not decrease it to its target at 6%.
Moreover, the difference between the two i.e. 1% also tells us that the banks should follow the central bank to keep the difference between the deposit rate and lending rate equal to 1%. However, it remains a dilemma whether whom the central bank discourage and whom to encourage to take loans government or private investors?
However, the rate of increase in home loans is around 17% which is equal to our natural growth rate or rate of growth population at 17%. The only growth rate compatible to our growth models that say actual growth rate must equal the natural growth rate. Natural growth rate is the rate of growth of population, and, since, everybody wants to own a house it seems logical and understandable, too…
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