Reverse Repo Rate cut Flashcards
What is the reverse repo rate?
The reverse repo rate is the interest rate that the central bank (e.g., the RBI in India) pays to commercial banks when they park their excess funds with the central bank.
How did the COVID-19 economic slowdown lead to banks parking excess funds with the RBI?
The economic slowdown due to COVID-19 decreased the demand for loans from businesses and consumers.
Banks, having excess money with limited lending opportunities, parked these funds with the RBI.
This parking of funds allowed banks to earn interest through the reverse repo rate.
Why did the RBI reduce the reverse repo rate to 3.35%?
The RBI drastically reduced the reverse repo rate to discourage banks from parking excess funds idly with the RBI. The goal was to push banks into actively lending money to stimulate the economy.
Explain the intended benefit of reducing the reverse repo rate, using SBI’s fixed deposit interest rate (5.9%) as an example.
If SBI offers a 5.9% interest rate on fixed deposits but earns only 3.35% from parking those funds with the RBI, it incurs a loss.
The RBI hoped that this reduced profitability would force banks like SBI to proactively lend money instead, potentially through marketing like SMS, email, or telemarketing.
Despite the reduced reverse repo rate, why did banks continue to park surplus funds with the RBI according to “ES21”?
According to your source, ES21, the COVID-19 economic slowdown caused a lack of reliable borrowers. Even with reduced profitability for parking funds with the RBI, banks may have viewed this as a safer option than risking defaults on loans.
