What is repo rate ? Why RBI increase it by 40 bps?

Repo: It is defined as an agreement in which if a party wants to sell securities or any other assets to some other party and makes a pledge/bind to repurchase the same assets from the other party in future at the rate which is higher than actual sale price (+ some interest) during the term.

Repo

There are generally two types of banks Central bank and Commercial bank
RBI is central bank and HDFC kotak ICICI are commercial banks.


Repo Rate: Repo Rate is also known as repurchase rate. It is used by the central bank (RBI in case of India) to lend money to other commercial banks for short-term requirements.
The Interest rate is very low as compare to market rates.
Commercial banks takes loan from RBI and gives loan to people like us charging extra interest rates.
Commercial banks offer securities like SDLs and Treasury bills to the RBI in return.
It is often used to control inflation and maintain liquidity by balancing the printing of notes.

When a major crisis happens like Coronavirus, the economy gets hit and major commercial banks wants short-term funds from central banks. RBI levies interest on the amount that is lent to the commercial bank. this interest rate is known as repo rate.

As per August 2021 , RBI kept the repo rate at 4% but on 4th May 2022 RBI shockingly increased the rate by 50 bps. 1 bps is one-hundredth of a percentage point.
Reason to increase the repo rate was the high inflation and excess printing of currency during coronavirus period.

Result of increasing the repo rate is that the loans become costly to people.
Middle class gets crushed with high inflation and high EMIs.

One Small benefit of this : FDs interest rates might go up slightly.

Thanks 🙂