Finance, Forex and Investments

why reserve bank of india hikes interest rates?

repo rates and reverse repo rates hikes? why?it is short term lending,how much short?

Public Comments

1. To keep the exchange rate and to curb inflation.
2. According to classical economics, interest rate hike invites more foreign investments and improves currency and also helps to lock some domestic money so that liquidity is less and inflation is controlled. perod less than an year is short-term in moneymarket. First the easy example- I’m the RBI manager. · When I give you security (paper) & take money from you – this is Repo. · When I buy the security (paper) from you and give you money- this is reverse Repo. Now the more correct example I’m the RBI manager. · When I give you security (paper) & take money from you & promise you that I’ll buy the same paper back from you after few months – this is Repo. · When I buy the security (paper) from you and give you money & you promise me that you’ll buy back that paper from me after few months- this is reverse Repo. RBI & Repo · absorption of short-term liquidity, RBI carries out overnight (one day) repo auction at a fixed rate. · Currently, fixed-rate repo and reverse repo auctions are conducted by the RBI on a daily basis (excluding Saturdays, Sundays and other public holidays) for 1 day (overnight) tenor. · This means, RBI is ready to sell as much securities as is demanded by the participants at the fixed rate. · This rate is fixed in the sense that it does not change on a daily basis depending upon the supply-demand condition of short-term liquidity · Changes in the fixed repo rate are usually made in the Annual Monetary and Credit Policy or in the Mid-Term Review of the Monetary and Credit Policy. RBI & Reverse Repo · In order to inject liquidity into the system, RBI conducts fixed rate auctions of reverse repo at a rate higher than the repo rate. · The reverse repo rate is linked to the repo rate in the sense that it is set at specific percentage point above the repo rate. Definition difference from international market. · Keep in mind, the terms repo and reverse repo have been defined above, is just opposite to the international practice. · That is, what is repo in Indian terminology is reverse repo in international parlance, and what is reverse repo in India is internationally known as repo. · In a fast globalising environment, this may create confusion. · Consequently, RBI has changed the definitions of repo and reverse repo to bring them in line with international practice with effect from 27th October 2004. · However, in this article, we have throughout followed the older (Indian) definition. Repos/Reverse Repos · repo (also known as ready forward contract) transaction, Example · Suppose I write on a piece of paper “anyone who gives me 100 Rs. I’ll give him 120 Rs. After 1 year” · this piece of paper is security. · Now I give that paper to you and collect 100 Rs. And tell you that I’ll buy (repurchase) that paper after 6 months and give you 110 Rs. · This is called repo-contract · And this period (6 months) is repo period. Same is for ‘Reverse Repo Rate’