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Repo Rate Drops

Repo Rate Drops

The Reserve Bank of India (RBI) reduced its key short-term lending rate (Repo) by 100 basis points with immediate effect. It now stands at 8%. A few days ago, the RBI had slashed the Cash Reserve Ratio (CRR) by 250 basis points to 6.5%.

The Repo Rate is the rate at which banks borrow from the RBI. The Repo Rate also has a direct bearing on the overnight or the call money market; this is the market where banks and primary dealers borrow money for 1 to 14 days. The rate at which the RBI borrows from banks is called the Reverse Repo Rate. On the other hand, the CRR is the amount of money that the banks have to keep with RBI. If RBI decides to decrease the percent of CRR, the available amount with the banks goes up.

No one can accuse the RBI of being placid. Last week it provided a temporary credit line to mutual funds to enable them to bridge the gap between redemption requests and the sale of underlying securities. To view the full story, read RBI to the rescue.