Chapter 3 Part 2 - Banking

Economics Class 12
Macroeconomics

## What is Repo Rate?

It is Rate of Interest charged by Central Bank from commercial banks

Explanation

Sometimes Banks are short of funds

They need money to give loans to public

So Central Bank Gives money as loan to these banks and charges Rate of Interest

This Rate of Interest charged by Central Bank is called Repo Rate

## What is Reverse Repo Rate?

It is Rate of Interest charged by Commercial banks from Central Bank

Explanation

Sometimes Banks have Surplus Funds

So they give these funds to Central Bank as loan

This Rate of Interest charged by Commercial banks from Central Bank is called Reverse Repo Rate

#### Note

Both Repo and Reverse Repo Rates are fixed by Central Bank

(and not commercial banks)

### NCERT Questions

No questions in this part

### Other Books

#### Question 1

In the following questions, select the correct answers:

What will be the effect of increase in 'Repo Rate' on the money supply?

a. Money Supply will increase

b. Money Supply will decrease

c. Money Supply will remain same

d. Money Supply will initially increase and then decrease

#### Question 2

Reverse repo rate is the rate at which Central Bank:

a. Lends money to commercial banks for short-term

b. Lends money to commercial banks for long-term

c. Accepts deposits from the commercial banks

d. None of these

### Transcript

What is Bank Rate or Repo Rate? Central Bank gives loans to Commercial Banks for lending to Public Rate of Interest charged by Central Banks on these loans is Repo Rate Example RBI gives loan to SBI @ 8% SBI uses this money to give loan to Mr A @ 11% RBI (Central Bank) SBI (Commercial Banks) A (Public) This 8% is called Repo Rate or Bank Rate This 11% is called Lending Rate of Bank Who Determines Repo Rate? Central Bank (Example – RBI in India) Who Determines Lending Rate It is determined individually by each bank Effect of Repo Rate Change –Increase/Decrease What happens if Repo Rate Increase? What happens if Repo Rate Decrease? Suppose RBI increase Repo Rate from 8% to 9% Suppose RBI decrease Repo Rate from 8% to 6% If Repo Rate Increases More interest will be paid by bank to RBI Bank will also charge more Interest from customer People will take less loans Decrease in Money Supply with Public If Repo Rate decreases Less interest will be paid by bank to RBI Bank will also charge less Interest from customer People will take more loans Increase in Money Supply with Public What is Reverse Repo Rate? Commercial Banks sometime makes Deposit with Central bank Rate of Interest received by Commercial Banks from Central Banks on these loans is Repo Rate Suppose Customers deposits 100 Crore in SBI in Savings and FD Account SBI Bank uses this money to give loan to Public of 80 Crore @ 10% p.a Remaining 20 Crore it deposits with RBI @ 6% p.a Who Determines Reverse Repo Rate? It is determined by Central Bank like RBI in India (and not commercial banks) Difference between Repo Rate and Reverse repo Rate It is Rate of Interest Charged By Central Bank From Commercial banks It is applicable on Loan taken By Commercial Banks From Central banks It is Rate of Interest Paid by Central Bank To Commercial banks It is applicable on Deposits made by Commercial Banks with Central banks Both Repo Rate and Reverse Repo Determined by Central Bank (RBI) And not Central banks Effect of Reverse Repo Rate Change What happens if Reverse Repo Rate Increase What happens if Reverse Repo Rate Decrease If Repo Rate Increases Bank will deposit more with Central Bank So less Amount available to give loans People will take less loans Decrease in Money Supply with Public Bank will deposit less with Central Bank So more Amount available to give loans People will take more loans Increase in Money Supply with Public