What are repo and reverse repo rates?
Repo rate is the rate of interest charged by the central bank when banks borrow money from it. It is the tool through which the RBI in-jects funds into the system.
Repo rate is the rate of interest charged by the central bank when banks borrow money from it. It is the tool through which the RBI in-jects funds into the system.
The Reverse repo is the rate the RBI offers to banks when they deposit funds with it. The central banks drains out liquidity from the finnacial sustem through reverse repo. Over a longer time, the RBI can also manage liquidity through open market operations.
What is an interest rate corridor?
Interest rate corridor refers to the window between the repo rate and the reverse repo rate. When liquidity is tight and banks need short-term funds from the RBI to manage their mismatches then repo rate is the effective policy rate. But if liquidity returns to the system the reverse repo would become the operative policy rate as the RBI would be draining out funds from the system. This means that the short term interest rates will move within the interest rate corridor.
Why is a narrow rate corridor desirable?
A narrow rate corridor means that short-term interest rates in the call money market will move within that band. This band was earlier 150 basis points, which has now been lowered to 125 basis points. Effe-cively, the narrower rate corridor will mean there will be less volatility in short term rates.
Do other central banks also have rate corridors?
Many developing countries have the rate corridors but central banks in developed and deeper financial markets have a single rate. In the US, for instance, the Fed Fund rate is the key interest rate. Short term funds are available at this rate to the eligible borrowers.
What is an interest rate corridor?
Interest rate corridor refers to the window between the repo rate and the reverse repo rate. When liquidity is tight and banks need short-term funds from the RBI to manage their mismatches then repo rate is the effective policy rate. But if liquidity returns to the system the reverse repo would become the operative policy rate as the RBI would be draining out funds from the system. This means that the short term interest rates will move within the interest rate corridor.
Why is a narrow rate corridor desirable?
A narrow rate corridor means that short-term interest rates in the call money market will move within that band. This band was earlier 150 basis points, which has now been lowered to 125 basis points. Effe-cively, the narrower rate corridor will mean there will be less volatility in short term rates.
Do other central banks also have rate corridors?
Many developing countries have the rate corridors but central banks in developed and deeper financial markets have a single rate. In the US, for instance, the Fed Fund rate is the key interest rate. Short term funds are available at this rate to the eligible borrowers.
