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Repo Rate & Reverse Repo Rate - Liquidity Adjustment Facility (Hindi) - YouTube

Channel: Asset Yogi

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Namaskar, my name is Mukul, and welcome to asset yogi.

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Friends, you may have read in newspapers that RBI has increased the Repo Rate.

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Now, what's the impact of this?

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that the bank's interest rates,loan's interest rates will increase or decrease?

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Inflation will increase or decrease?

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We are going to learn all this in this video.

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See, repo rate and reverse repo rate are a liquidity adjustment facility

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which is held by RBI

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and it is a kind of measure through which

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how much money should go into the market?

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how much money should go into the economy?

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that can be controlled.

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In this video, we will see what are these rates?

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How RBI maintains a balance between growth and inflation?

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This video is also a part of a series in

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which we are discussing RBI's monetary policy.

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In the last video, we had discussed CRR and SLR.

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If you haven't watched the video yet, then do watch it.

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So that you can get to the wholistic picture.

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I will talk about this in upcoming videos too.

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For example, what are marginal standing facility and bank rates?

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that we will see in the next video.

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In this video, let's quickly understand repo rate and reverse rate.

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Let's go straight to the blackboard.

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In our last video, we have talked about CRR and SLR requirement rate.

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Let's do a quick recap!

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We have seen how the bank and its business works.

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it basically collects deposits either from the customers or the organizations

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be it government or private.

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and we divide these deposits into demand and time liabilities

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it is called NDL, net demand and time liabilities.

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demand liabilities are when you can withdraw money on demand,

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whenever you feel like

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like saving and current accounts

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Time liabilities are when you can withdraw money after a certain amount of time.

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like fixed deposit.

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Now, I've already made a detailed video on NDTL.

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So, you can watch that video that exactly how NDTL is calculated.

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Now, the bank has got all these deposits

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Let's suppose the bank's NDTL is 100 crores,

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then the bank will forward it in the form of loan, only then its business will run.

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so, here it can't give 100 crores of 100 crores as a loan

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for that you have to fulfill the requirements of CLR and SLR

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which are regulated by RBI.

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So, here as we have already seen in the last video,

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that out of this 100 crore,4 crores will have to be deposited to RBI

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basically 4% of NDTL

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that is you Cash Reserve Ratio

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that means you've to fulfill the CRR requirement

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and 19.5 crores, which is 19.5% of NDTL

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in the form of SLR, the bank has to keep with them

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which we call Statutory Liquidity Ratios.

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These are your liquid assets.

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in the form of liquid assets, the Bank has to keep this much money with itself.

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if any kind of crisis situation comes,

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then the bank should have these highly liquidated assets.

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so, when all these requirements are met,

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then how much money is left with the bank?

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76.5%

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so this 76.5% money can be lent further as a loan by the bank.

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So this is all about CRR and SLR.

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Other than these, for liquidity adjustment, there's one more tool with RBI

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which we call Liquidity Adjustment Facility.

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Within which our Repo Rate and Reverse Repo Rate come.

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So what happens inside it, suppose the banks need some money for emergency

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Or else banks have to meet their CRR and SLR requirements.

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Like we talked about 4% and 19.5%

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Let's say banks don't have sufficient money with themselves.

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So, in such a case, banks can borrow money from RBI

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And on top of that they have to pay some interest rate.

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Now, this interest rate is what we call the repo rate.

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Meaning if banks borrows some money from RBI

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then, in this case, we will give call it repo rate

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Only the other hand banks can give money, can also lend to RBI

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in this case, it is called Reverse Repo Rate.

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If banks give money to RBI, then RBI gives them some interest,

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then we call it reverse repo rate.

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Now, how do the repo rate and reverse repo rate functions

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it does not function as a normal loan

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it functions as a forward contract loan

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Now, let's understand how its agreement is done, how its concept works.

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We have already talked about that repo rate is the rate of interest

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that the bank pays to the RBI over the amount of money it borrows.

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other than this, the banks have to give a collateral

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now, this commercial bank can't take an unsecured loan from RBI

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so here it has to keep government securities as collateral

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now, these government securities can be government bonds, treasury bills

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any RBI approvred securities.

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now see, it's not like that repo rate doesn't function like a normal loan

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it is basically a repurchase option

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if we talk about the full form of repo rate, then it is a repurchase option

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and one kind of forward contract or a forward agreement between bank and RBI

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What is happening in the bank that the bank is making a promise that

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it will keep its government securities with the RBI and repurchase them in the future.

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future means

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whatever the repo period is,

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after that period

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will buy back those government securities

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at a pre-determined rate

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Now, let's talk about the repo period.

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how much will be the repo period?

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generally, it is overnight

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one day repo period.

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but RBI has also launched term reports now

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so if we talk about term repo, then an average of 7 days.

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then generally it's a 7-day repo rate in that case

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So 7 days interest will have to be paid

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let's see its functioning once, How does it work?

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as we have already talked that, it is a repurchase option agreement

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inside it, the sale and purchase is happening

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actually, it is a kind of sale purchase agreement

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so, how will it work?

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if we talk about overnight repo rate then Let's suppose

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On the first day, the commercial bank will put its government securities with RBI

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as a collateral

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And when the government securities will come to RBI, then

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Whatever money he wants to borrow, let's say he wants to borrow 10 crores,

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then RBI will disperse 10 crores,

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and here the value of the government securities will also be 10 crores.

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and the second day

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the commercial bank will return 10 crores plus it will pay 1-day repo interest to RBI

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after that RBI will return the government securities

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so this is the simple transcation

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What's happening here is that,

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this commercial bank sells the government securities to RBI.

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and promises to buy it back

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And on the second day, at the predetermined rate,

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this 10 crore plus repo interest, it buys it back in this amount.

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that's why we call it a sale-purchase agreement.

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or a repurchase-option agreement.

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now let's see, how much will be the repo interest for a day?

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so 10 crores, according to 6.50% per annum, this is the rate going on nowadays

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we are talking about today's date, i.e September 2018

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According to 6.50%, if you take out 1-day interest of 10 crores, then

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it will be around Rs.17,808

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so 10 crores plus Rs.17,808,

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this commercial bank has to give to RBI, after a day

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and, if by chance, this commercial bank defaulted

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and did not return this money the next day

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then in such case, RBI can sell these government securities in the open market

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so that's why here is the advantage of collateral, it is this type of secured loan

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so this is the functioning of the repo rate

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now, let's also see the reverse repo rate once

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what happens in the reverse report rate is that

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if the bank has some surplus cash then it deposits it with RBI.

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And RBI pays some interest to the bank in that case

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we call it reverse repo rate.

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This case also has the same functioning, here also you have to keep the collateral

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here the bank will give collateral to the RBI in form of government securities

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here, we will call the agreement as Reverse Repurchase Option Agreement

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which will be between the bank and the RBI

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banks promise to re-sell

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Here the bank will take government securities from RBI and

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will promise that I will resell it on the future date

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and what will be that future date, after the time of reverse repo period

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now, this reverse repo period is also overnight, generally.

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but if we talk about the term reverse repo

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then its of 7 days genreally

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You get all these rates from the RBI website.

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Now, let's understand this once, see if suppose, on the first day

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if we talk about overnight reverse repo rate, then what will happen?

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if the commercial bank has a surplus of 10 crores, then it will give it to RBI

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RBI will keep the government securities as collateral

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on second day,

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RBI will give the commercial bank, 10 crores plus 1 day reverse repo rate

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I have put the reverse repo rate here by mistake.

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so, whatever will be the reverse repo rate's additional interest,

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that amount will have to be paid by RBI to the commercial bank

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and with this, the commercial will return back the government securities to the RBI

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And here, if we talk about the calculation, then in 10 crores,

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the one-day reverse repo interest rate is running at 6.25% in today's date

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so if we take out for one day on 10 crore

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then it will be around Rs. 17,123.

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so 10 crore + Rs.17,123 will have to be given by RBI

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if there's any agreement of reverse repo rate

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between bank and RBI

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Now look here what we are talking about Repo Rate and Reverse Repo Rate in this

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mainly for commmercial bank and RBI

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because generally in India, repo rate and reverse repo rate are used for them only

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otherwise, it can be used between any buyer and seller securities

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here, in this case, this is the buyer, and RBI is basically the seller of securities

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So any buyer and seller of securities, if they

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go for reverse repo repurchase agreement, then it becomes your reverse repo and

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if they go for re-purchase agreement, it becomes your normal repo.

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so here, your concept of repo and reverse repo rate would have been cleared

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Now, let's see how RBI controls inflation through repo rate and reverse repo rate.

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as of today's date, September 2018,

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repo rate is 6.5% and Reverse Repo Rate is running at 6.25%

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let's suppose inflation is very high

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and RBI wants to control inflation, what will it do?

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it will increase the repo rate

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and reverse repo rate too.

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so if the RBI increases repo rate and reverse repo rate, then

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the money that banks will get from RBI will be available at a slightly higher rate.

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because now repo rate has become 7%

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So, if they pay more interest rates themselves, then it is natural that,

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they will charge higher interest rates to the consumers.

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so interest rates will increase in the market

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if the interest rate increases in the market, then people take fewer loans

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if people take fewer loans, then the money supply in the market will also decrease

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because people will only spend their savings

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loan money will not be available with them

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money supply will decrease in the market

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naturally, people's demand will also decrease

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Demand for things will be less , spending will be less

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Now if the demand is low, then the prices of things go down.

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If the prices are low, it is a natural thing that inflation will be low.

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Now here we assume that inflation is not high, inflation is low

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And RBI now wants to increase the growth

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So what will RBI do in such a case?

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Instead of 6.30% it will set 6% repo rate

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and will also reduce the reverse repo rate

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let's say it reduces to 5.75%

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So in such cases, the interest cost of the banks will reduce

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So it is natural that the bank will pass on the benefit to the consumers.

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In competition, if even one bank reduces its interest rate,

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then all the banks have to reduce their interest rate.

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So, naturally , the interest rate will come down in the market.

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of every kind of loan, be it a home loan or personal loan

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be it any other loan

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If the interest rate will be less then it is natural that people will take more loans.

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If you take more loans then the money supply will increase in the market.

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If the money supply increases, the demand for things will increase.

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People's spending power will increase.

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And the economic cycle starts churning faster

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So in such a situation, your growth rate becomes very high

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growth rate becomes high, demand and spending also increases with people

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So, a little pressure starts increasing on the price.

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because if the demand has increased,

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then naturally, the prices of things will also increase.

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Now, if the prices increase, then inflation also starts increasing a bit.

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So the sole purpose of RBI is to keep the price stable

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and maintains a balance between growth and price

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and that's why it sometimes increases the repo rate and sometimes decreases it.

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So basically RBI has to keep maintaining this balance.

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So in this way, with the help of repo rate and reverse repo rate,

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inflation can be controlled by RBI.

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so this is all about repo rate and reverse repo rate

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Now, there are some other rates like bank rate and margin security facility

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we will talk about it in the coming video.

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If you like this video then give it a like

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and share it with your friends and family members also

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so that they can also get the benefit of this video.

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If you have any suggestions or want to give any feedback

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Repo Rate &amp; Reverse Repo Rate - Liquidity Adjustment Facility (Hindi) - YouTube

Repo Rate & Reverse Repo Rate - Liquidity Adjustment Facility (Hindi) - YouTube