Reverse repo normalizationDate: 31 January 2022 Tags: Basics of Economics
The State bank of India, the largest public sector bank in India, has stated that the stage is set for reverse repo normalization in India.
Normalization means the reverse repo rate of 3.35 per cent can be raised to 3.75 per cent in one or two stages in future.
The RBI’s revised liquidity management framework has maintained the width of the liquidity management corridor at 50 basis points.
This means that reverse repo rate is 25 basis points below the repo rate and the Marginal Standing Facility rate is 25 basis points above the repo rate.
Reasons for normalization
The domestic economy is on the path of recovery, witnessing strong growth in terms of GDP rate.
The low interest rates have resulted in inflationary trends and government needs to step in and cool the economy.
By raising the interest rates on reverse repo, the RBI will ensure that more funds of banks are parked with RBI.
Impact of normalization
As reverse repo rates increase, the funds from open market will be absorbed and parked in RBI coffers until economy cools down.
Repo rate is the rate at which RBI lends funds to commercial banks in order to increase liquidity and boost economic growth.
Repo rate is the primary tool used by the central bank to control money supply in the economy and thus control inflation.
It is the rate at which banks park their funds with RBI for a fixed rate. The reverse repo rates are always below repo rates.
An increase in reverse repo rate signals that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.