Question

“In order to recover with the effects of pandemic COVID-19 RBI has decreased the repo rate to 4% and reverse repo rate to 4.5%”. In relation to above statement explain the concept of two rates and their implication.

Answer 1

The rate at which banks borrow short-term funds from RBI is called 1. Repo Rate. Such funds are provided on the promise of repurchase of approved securities by banks. Thus there are two legs in the Repo Transaction Process. Banks facing a shortage of funds can borrow from RBI through a repo transaction. The transaction is backed by sale of approved securities to the RBI. A reverse repo is the opposite of a repo.

2. A decline in the repo rate can lead to the banks bringing down their lending rate. This can prove to be beneficial for retail loan borrowers