Today RBI changed the REPO RATE FROM 6.25% to 6%
What is REPO RATE?
Repo Rate is the rate at which CENTRAL BANK of a country like RBI, lends money to other banks like SBI, Axis banks, etc. in case of any shortfall of funds by banks like SBI, etc.
Let’s take a hypothetical example, If I visit HDFC bank today and ask for a loan of 5000 crores � and if HDFC bank has funds of only 4000 crores in that condition HDFC will ask for a loan of 1000 crores from RBI @6% (current rate, today) and provide that loan to me.
Earlier effect and Later effect
Let’s suppose, in the last example, HDFC was providing me the loan at @12% when HDFC is getting a loan from RBI at 6.25% but HDFC is getting Loan @6% only from RBI, so, possibilities are that HDFC will provide me loan also at 11.75% (12% – 0.25% = 11.75%) because HDFC is now getting cheaper loans.
WHY RBI Decrement REPO Rate?
RBI decrease REPO rate so, that more people or business can access loan (see in above example, loan rates have gone down. So, if people will get a cheap loan, they will ask for more also).
Which in turn leads to control Inflation (mehangai, dearness)? HOW?
Let’s take a hypothetical example, that after decrement or decrease in REPO rate Trucks loan rate has gone down, so, now Truck Drivers are getting loans at cheap rates (comparatively) and they have to pay less interest on their loans. Eventually, when they will supply goods like MILK or VEGETABLES it will be also available to us at cheap rates (comparatively).
Impact on Stock Market?
it can make up a positive impact on Stock Market because if things will be available at a cheaper cost (comparatively), people might demand more, and eventually, sales & profit of Listed Companies in the Stock Market will increase.
(BUT it’s not a necessity that stock market will go up and up only just after the news because Stock Market doesn’t run on Automation, it is run by Human Beings and smart money, which can make Market go high by providing Demand or can make Market go down by providing Supply.)
In the next blog, we will understand Reverse Repo Rate
Still having doubts?, Leave a comment below and I will be sure to follow up with you.