- Repo Rate Definition: - The repo rate, short for repurchase rate, is the interest rate at which the central bank (like the Reserve Bank of India) lends money to commercial banks against securities like government bonds. - It is a tool used by central banks to regulate liquidity, inflation, and economic growth. - Key Components: 1. Lending and Borrowing Parties: - In a repo transaction, there are two main parties: the lender (central bank) and the borrower (commercial bank). 2. Collateral: - The borrower pledges collateral (typically government securities) to the lender to secure the loan. This ensures that the transaction is secure for the lender. 3. Interest Rate: - The repo rate itself is the interest rate charged by the central bank on the funds lent to commercial banks. It determines the cost of borrowing for banks. 4. Tenor: - Repo transactions have a specified tenor or duration. They can be overnight (one day), term (more than one day), or open-ended (without a specified maturity date). 5. Role in Monetary Policy: - The repo rate is a crucial tool of monetary policy. By changing the repo rate, central banks can influence borrowing costs for banks and, indirectly, for businesses and consumers. - Lowering the repo rate encourages borrowing and investment, stimulating economic activity. - Raising the repo rate can help curb inflation by making borrowing more expensive, thereby reducing spending and demand. 6. Transmission Mechanism: - Changes in the repo rate are transmitted through the financial system, affecting other interest rates such as lending rates, bond yields, and deposit rates. 7. Market Operations: - Central banks conduct repo transactions as part of their open market operations (OMO) to manage liquidity in the banking system. - Reverse repo operations, where the central bank borrows funds from commercial banks, are another tool related to the repo rate. 8. Impact on Financial Markets: - Movements in the repo rate can influence stock markets, currency exchange rates, and overall investor sentiment depending on their implications for economic growth and inflation expectations. Understanding these components helps policymakers, economists, and financial market participants assess the implications of changes in the repo rate on the broader economy and financial system.
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Understanding CRR, SLR, and Repo Rate: The Basics Simplified If you’ve ever wondered how the banking system works or why financial terms like CRR, SLR, and Repo Rate keep popping up in news about the economy, this post is for you. Let’s break these terms down into simple language. 🏦 What is CRR (Cash Reserve Ratio)? CRR is the portion of money banks must keep with the Reserve Bank of India (RBI). Imagine you deposit ₹100 in your bank. The bank cannot use the full ₹100. A percentage (say ₹4, if CRR is 4%) must be kept as cash with RBI. Why does it matter? Ensures banks don’t run out of money to repay depositors. Helps the RBI control inflation and liquidity in the economy. 💰 What is SLR (Statutory Liquidity Ratio)? SLR is another percentage of deposits banks must keep, but this time, in the form of government securities, gold, or cash. Think of it as a safety net for banks. Why does it matter? Ensures banks have a backup in case of emergencies. Helps the government borrow money when needed by selling securities. 💸 What is the Repo Rate? The Repo Rate is the interest rate at which banks borrow money from the RBI. If banks run out of cash, they go to the RBI, pledge some securities, and get funds at this rate. Why does it matter? If the Repo Rate is high, borrowing becomes expensive, reducing the money flow in the economy (used to control inflation). If the Repo Rate is low, borrowing becomes cheaper, encouraging spending and investment. 🧩 How Do These Work Together? Think of the RBI as the guardian of the economy: CRR and SLR are tools to ensure banks remain stable and trustworthy. The Repo Rate helps manage money supply and keeps inflation under control. 📊 Real-Life Impact For You (as a consumer): Changes in Repo Rate affect loan interest rates. When it goes up, your EMIs can increase. For Businesses: Lower rates encourage borrowing and expansion; higher rates slow things down. For the Economy: These tools balance growth and stability 👇 Let’s Discuss! Have questions or insights about these terms? Drop them in the comments! Or share this post to help someone else understand the basics of banking.
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RBI Monetary Policy 2024 Highlights: Key Announcements and Market Reactions :👇 Repo Rate Stays at 6.5% The Reserve Bank of India (RBI) has maintained the benchmark repo rate at 6.5%, marking the 11th consecutive meeting with no changes. RBI Governor Shaktikanta Das confirmed that the Monetary Policy Committee (MPC) continues to adopt a ‘Neutral’ stance. CRR Reduced by 50 bps to 4% The Cash Reserve Ratio (CRR) has been lowered by 50 basis points to 4%. This move is expected to infuse additional liquidity into the banking system, encouraging more credit availability. This marks the first CRR cut since March 2020, also reduction will occur in two phases, with a 25 basis point cut in each tranche. Significant Boost for the Banking Sector Introduction of Secured Overnight Rupee Rate (SORR) To improve the credibility of interest rate benchmarks and foster growth in the derivatives market, the RBI will introduce a new benchmark—the Secured Overnight Rupee Rate (SORR). This will be based on secured money market transactions such as overnight repo and TREPS. SFBs Allowed to Offer Credit Lines via UPI Small Finance Banks (SFBs) can now extend pre-approved credit lines through UPI, a move designed to promote financial inclusion and benefit customers who are new to credit. Inflation Forecasts Raised for FY25 The RBI has raised its Consumer Price Index (CPI) inflation projection for FY25 to 4.8% (from 4.5%). Revised forecasts are: Q3 FY25: 5.7% (up from 4.8%) Q4 FY25: 4.5% (up from 4.2%) Q1 FY26: 4.6% (up from 4.3%) Q2 FY26: 4% GDP Growth Forecast Lowered The GDP growth projection for FY25 has been reduced to 6.6% (from 7.2%). Revised growth estimates include: Q3 FY25: 6.8% (down from 7.4%) Q4 FY25: 7.2% (down from 7.4%) Q1 FY26: 6.9% (down from 7.3%) Q2 FY26: 7.3% Market Reaction : Indian equity markets, including Sensex and Nifty 50, responded positively to the CRR cut, reflecting investor optimism.
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Understanding Repo Rate and Reverse Repo Rate The repo rate and reverse repo rate are critical tools used by central banks (like the Reserve Bank of India or the Federal Reserve) to control liquidity, inflation, and economic stability. These rates influence the cost of borrowing money in the economy and play a crucial role in shaping monetary policy. 1. Repo Rate: The repo rate (short for "repurchase rate") is the rate at which a country’s central bank lends money to commercial banks in exchange for government securities. This short-term borrowing helps banks manage their liquidity needs or address shortfalls in their reserves. How it works: When banks need funds, they sell government securities to the central bank and agree to repurchase them at a future date at a predetermined price, which includes interest at the repo rate. Purpose: It helps manage inflation and liquidity. By increasing the repo rate, the central bank can make borrowing costlier, reducing the money supply in the economy to control inflation. Conversely, lowering the repo rate makes borrowing cheaper, encouraging economic activity during slowdowns. Impact on the economy: Increased Repo Rate: Higher interest rates for loans (mortgages, business loans), reduced spending, and lower inflationary pressures. Decreased Repo Rate: Lower interest rates, more borrowing, increased consumer spending, and higher investment, promote economic growth. 2. Reverse Repo Rate: The reverse repo rate is the rate at which the central bank borrows money from commercial banks by lending securities to them. In other words, banks park their excess funds with the central bank and earn interest on them at the reverse repo rate. How it works: When commercial banks have surplus funds, they lend to the central bank in exchange for government securities and receive interest at the reverse repo rate. Purpose: It helps absorb excess liquidity from the banking system. By raising the reverse repo rate, the central bank can encourage banks to park more funds with them, thereby reducing the money supply in the economy. Impact on the economy: Increased Reverse Repo Rate: Banks are incentivized to lend more to the central bank, reducing the amount of money available in the economy, which can help control inflation. Decreased Reverse Repo Rate: Banks may prefer to lend to businesses and consumers instead of parking their funds with the central bank, increasing liquidity in the economy. How These Rates Influence Monetary Policy: Inflation Control: By adjusting the repo and reverse repo rates, central banks influence borrowing and lending rates in the economy. Higher repo rates curb inflation, while lower rates encourage spending and investment. Liquidity Management: The reverse repo rate helps manage excess liquidity by encouraging banks to park surplus funds with the central bank, thus reducing the risk of inflationary pressures.
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#Opinion: Reduced CRR offers banks a chance to boost quality lending amid liquidity concerns. Why does cutting CRR, not the repo rate, align with current economic needs? https://lnkd.in/gmHNzpzp
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On September 24 local time, the PBOC announced several measures to stimulate the economy in a press release: 1. The central bank plan to cut reserve requirement ratio by 50 basis points, providing about 1 trillion yuan in long-term liquidity to the financial market. 2. Reduce policy interest rates, lowering the 7-day reverse repo rate by 20 basis points, from the current 1.7% to 1.5%. This will guide both loan prime rates and deposit rates downward, helping to maintain the stability of commercial banks' net interest margins. 3. Introduce new monetary policy tool to support the stock market stability, allowing eligible financial institutions to obtain liquidity from the central bank. Additionally, special relending programs will be introduced to encourage banks to provide loans to listed companies and major shareholders, supporting stock repurchases and shareholding increases. 4. Reduce interest rates on existing mortgages and standardize the minimum down payment ratios for mortgages. Commercial banks will be guided to lower rates on existing mortgages, with an expected average reduction of about 50 basis points. The nationwide minimum down payment ratio for second-home mortgages will be reduced from 25% to 15%, unifying the minimum down payment requirements for both first-time and second-home buyers.
China central bank releases slate of support measures amid a deepening economic slump
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Have you ever wondered how freshly printed currency actually makes its way into the economy? Where does it go once it leaves the mint or central bank? Does it simply get handed out to the public or distributed through some invisible channels? In reality, the journey of new currency is carefully controlled and follows a series of well-defined steps to ensure it serves the economy’s needs. One of the primary ways freshly printed money enters the system is through the central bank's monetary policy. Central banks, like the Federal Reserve in the U.S. or the Reserve Bank of India, control the supply of money by either injecting or withdrawing it from the economy. When they need to increase liquidity, they engage in *open market operations*—buying government securities like bonds from commercial banks. In exchange for these bonds, the central bank provides freshly printed currency, which then flows into the banking system. The banks, in turn, can lend this money to businesses, individuals, or even governments, fueling economic activities like investments, consumption, and production. Another key channel is through government spending. When governments borrow money or have fiscal deficits, they may turn to their central bank for support. The central bank can print new money to finance government projects, whether it's infrastructure, defense, or social programs. As the government spends this money on goods, services, and salaries, the currency circulates into the broader economy. Commercial banks also play a crucial role. They can access freshly printed money through *central bank lending facilities* such as the discount window. When banks need liquidity, they can borrow new currency from the central bank using their assets, like loans or securities, as collateral. This money, once in the hands of banks, is used for issuing new loans to businesses or consumers, expanding the money supply. Additionally, during times of crisis, governments may implement *quantitative easing* (QE), a process where the central bank creates large amounts of new money to purchase financial assets like bonds or mortgage-backed securities. This method not only provides fresh liquidity to financial institutions but also lowers interest rates, encouraging more borrowing and investment, helping stimulate economic growth. Thus, fresh currency enters the economy not in a scattershot way but through these deliberate and controlled mechanisms. Whether through bank loans, government spending, or central bank interventions, each pathway is designed to ensure that money reaches the hands of businesses and consumers, influencing inflation, employment, and economic growth. - Sai Pradeep A.
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Today, the RBI Governor announced the MPC's decision that the Policy Repo Rate would remain unchanged. However, the Cash Reserve Ratio will be reduced by 50 bps over two tranches to increase liquidity. Let us understand the reason behind this decision and how not changing the base rate and decreasing the CRR will help boost economic productivity while also keeping inflation in check. 🔍 What is CRR? Banks are required to hold a portion of their deposits with the central bank as reserves for emergencies. This portion is termed the CRR. Lowering it means banks can lend more or invest those funds instead of parking them as reserves. How does the CRR Impact the Economy? 1️⃣ More Liquidity for Banks: Banks now have more money to lend as the reserve requirement is decreased, increasing the flow of credit in the economy. Businesses and individuals can access loans more easily. 2️⃣ Interest Rates May Soften: Even without a change in the repo rate, increased liquidity could drive competition among banks, nudging loan and deposit rates downward. 3️⃣ Economic Activity Gets a Boost: With easier access to credit, businesses can invest in growth, and consumers may spend more on homes, cars, and other goods. This fuels demand and stimulates growth. Mind that the base rate for loans has not decreased. But instead, the volume of loans will be increased. So credit will be diverted towards productive sectors. 4️⃣ No Change to Policy Stance: Lowering the CRR allows the central bank to inject liquidity without changing the repo rate, maintaining a cautious stance on inflation while supporting growth. 🔑 Why Does the Central Bank Choose This Path? 🔸 To tackle liquidity shortages in the banking system. 🔸 To boost credit flow in specific sectors like SMEs or real estate. 🔸 To counter external shocks, such as tighter global monetary conditions. 🔸 To keep the rising inflation in control while taking care of the overall demand and the growth in the economy does not stagnate. 💭 My Take? I personally expected the RBI to cut base policy rates because of the global pressures and decreasing economic growth. But as the inflation is also out of the range towards the higher side, cutting the policy rates would mean further increasing the risk of higher inflation. So, I think the decision to keep the base rate unchanged and to decrease the CRR is very good in the sense that it will help boost the demand and growth in the economy while also ensuring that inflation remains in a controllable range. What do you think about this approach to monetary policy? Does it strike the right balance between growth and inflation control? Share your thoughts in the comments. #RBI #RBIPolicy #MonetaryPolicy #Inflation #Economy #FinancialAwareness #FinancialLiteracy #Economics #Finance
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PROFITABILITY PRESSURE In Tuesday's broad policy stimulus measures unveiled by Beijing, it also announced a 50-basis-point reduction on average interest rates for existing mortgages and a cut in the minimum downpayment requirement. While most analysts expect the banks to lower their deposit interest rates to cushion the impact on their profitability, the lenders are still expected to take a hit on their net interest margins, which has already dropped to the lowest on record. The net impact of the rate cuts on NIM will be around 3 basis points for 2025, according to JPMorgan research note. The central bank said on Tuesday that the impact of the "rate adjustment plan" on banks' income will be neutral, while NIMs of banks will remain largely stable due to cut in banks' borrowing costs and the repricing of deposit rates. China would lower the reserve requirement ratio and implement "forceful" interest rate cuts, according to an official readout of a monthly meeting of top Communist Party officials, the politburo, released on Thursday. "The policy combo is positive to the banking sector in the near term ... and we estimate the net impact of (the) rate cut is only less than 3% on earnings," JPMorgan analysts wrote in a research note on Wednesday. However, investors could book profits on some state bank shares now and revisit them when more clarity emerges on capital infusion, it said, as "there may be concerns on rising national service risk and questions on medium-term profitability." The outstanding value of individual mortgages stood at 37.79 billion yuan ($5.31 billion) at the end of June, down 2.1% year-on-year, according to the central bank data. That accounted for about 15% of banks' total loan books, the data showed. "Authorities will prioritize riskier institutions for capital injections and balance sheet cleanup," said Ming Tan, director at S&P Global Ratings, adding regulators are expected to encourage the stronger banks to absorb weaker players. ($1 = 7.0246 Chinese yuan renminbi)
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Key takeaways from the MPC meeting : 1) Repo Rate: Maintained at 6.5% with a 5:1 majority, aiming to align inflation with targets while supporting growth. 2) SDF & MSF Rates: SDF rate at 6.25%, MSF and Bank rates at 6.75%. 3) GDP Forecast: Projected steady growth of 7% in Q2, 7.4% in Q3 and Q4, with a slight dip to 7.3% in Q1 of FY26. FY25 forecast remains at 7.2%. 4) Inflation: Projected at 4.5% for FY25, with quarterly figures of 4.1% (Q2), 4.8% (Q3), and 4.3% (Q1 FY26). 5) Indian Rupee: Continues to be the least volatile among global currencies. 6) Das’ Message to NBFCs: Urged banks and NBFCs to carefully assess their exposures. 7) FPI Flows: Shifted from net outflows to net inflows of $19.2 billion between June and October. 8) Current Account Deficit: Widened to 1.1% of GDP in Q1 FY25. 9) Responsible Lending: Banks and NBFCs cannot levy pre-payment penalties on floating rate loans to individuals for non-business purposes. 10) Urban Cooperative Banks (UCBs): Discussion paper on capital raising avenues to be issued for stakeholder feedback. 11) Climate Risk Assessment: RBI to launch the Reserve Bank Climate Risk Information System (RBris). 12) UPI Enhancements: UPI One Three Pay transaction limit raised to Rs 10,000; UPI Light wallet limit increased to Rs 5,000, with per-transaction limits up to Rs 1,000. 13) RTGS & NEFT: Beneficiary account name lookup facility to be introduced to reduce wrong credits and fraud. These highlights focus on growth, inflation control, financial stability, and enhancing digital payment systems.
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what are the Repo rate and Reverse repo rate? The two Liquidity Adjustment Facility with the Central Bank are the Repo Rate and Reverse Repo Rate. 1)Repo Rate is the rate at which the central bank i.e. Reserve Bank charges interest for granting loans to a commercial bank, while Reverse repo rate is the interest rate offered by the RBI, to the commercial banks on the deposits, who park their surplus funds with RBI. 2)Repo rate is the rate at which liquidity is absorbed in the economy. In reverse repo, the rate at which liquidity is injected into the economy. 3) The main purpose of the repo rate is To fulfill the deficiency of funds. main purpose of the reverse repo rate is To manage liquidity in the economy. 4) The repo rate is high as compared to the Reverse repo rate. The Reverse repo is Comparatively less than the Repo rate. 5) Repo rate Controls the Inflation while, Reverse repo rate controls the money supply in the economy 6) if the repo rate is increased, It will make commercial banks borrow less from the Central bank, due to the high interest rate. if the Reverse repo rate is increased , It encourages commercial banks to transfer more money to the central bank and earn interest. 7)if the repo rate is decreased, Taking loans from RBI will become cheaper for the banks. if the Reverse repo rate is decreased , Banks will invest their money in better avenues than depositing their money with RBI. 8) The current repo rate is 6.50% and Reverse Repo Rate 3.35%.
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