RBI has reduced the reverse repo rate by 25 bps from 4 % to 3.75% recently.
Key takeaways:
Previously, the RBI used its repo rate as the main instrument to adjust the interest rates.
Presently, it is making change to the reverse repo rate to set the benchmark.
The idea is to discourage banks from keeping surplus funds with itself and from lending their funds to the RBI to make profits.
This practice hurts the economy and starves the businesses that genuinely need funds.
Important value additions:
The repo rate is the rate at which the RBI lends money to the banks for short durations.
The reverse repo rate is the rate at which banks lend their money to the RBI.
When the economy is growing, the repo rate is the benchmark interest rate in the economy and it also forms the floor rate for all other interest rates in the economy.
Since, India’s economic growth has decelerated sharply since last two years and banks are not lending to businesses, because banks are too risk-averse to lend and also, the overall demand from the businesses has decreased.
In order to change this trend, the RBI has cut the reverse repo rate more than the repo twice in the spate of the last three weeks.
