- The repo rate (repurchase rate) is the interest rate at which the central bank(RBI) lends money to commercial banks.
Who decides the repo rate?
- The monetary policy committee of the RBI decides the repo rate.
Why is it important?
- Will help commercial banks deal with the liquidity crisis. This will help in ensuring the flow of money in the market.
- If there is low economic growth, the RBI can lower the repo rate and ensure cheaper money is available for business.
- When inflation is high, the central bank may increase the repo rate and reduce the flow of money into the market.
- The loans available for the common man and business will be cheaper or costlier based on the repo rate.
- Consumers will deposit more money with banks when the repo rate is higher, as they earn more interest. This will ensure better funds for banks.
What is the Monetary Policy Committee?
- It is a six-member committee headed by the governor of the RBI that meets bi-monthly to assess the economic growth and inflation situation within the country.
- They decide upon the repo rate to meet the above targets.
Sources: The Hindu