One of the most common banking terminology is repo rate. The repo rate is that rate at which commercial banks can borrow money from central bank .of the country such as in India all commercial banks can borrow money from Reserve bank of India.Now you must be wondering why do banks need to borrow money from central banks.So lets take a deeper look into this.
Why Banks borrow from central banks?
The most basic reason for banks to reach out to Central banks for funds is to meet the shortfall of money which they might be facing in the market.In other words you can say that there is less money in the market and thus exists a shortfall of money. To make up for that shortfall banks need to borrow money from Central bank and the rate at which central banks lends to the commercial banks is known as repo rate.
Effects of change in repo rate.
When repo rate is increased by the central bank, borrowing money from central bank becomes costlier for commercial banks. While in case of decrease in repo rate borrowing money becomes cheaper for other banks. Repo rate is used by central bank to control liquidity, money supply and inflation levels.When the economy of country need money supply the central bank decreases the repo rate so that banks can easily borrow the money. When there is already excess money in the economy central bank increases the repo rate so as to make it difficult for banks to borrow money.