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  • Category: Banking

    What is the effect of change in REPO and reverse REPO rate on stock market by RBI?

    Curious to know how change in REPO and reverse REPO rate by RBI will affect the stock market? Get a detailed analysis of this information from our banking experts.

    I want to know complete details about REPO rate and reverse REPO rate. What is the effect of change in REPO and reverse REPO rate on stock market by RBI? How does banking sector and in turn other sectors be affected by this move by RBI?
  • Answers

    2 Answers found.
  • Before dwelling into the effects of REPO and Reverse REPO rate, let me explain the terms.
    REPO Rate -
    It is the interest charged by the reserve bank for the commercial banks on the money it lends to them. Increase in REPO means banks have to pay more interest to the RBI for the money they take from it, thur it increases the cost of funds. That in turn will mean banks will charge an increased rate of interest to the end customers.
    Reverse REPO Rate -
    This is the rate of interest that RBI pays to the commercial banks on any money that RBI lends from these banks.
    CRR -
    CRR or Cash Reserve ratio is the percentage of total deposits that a commercial bank has to keep with RBI. For instance, if CRR is 5%, banks need to have 5% of their total deposits to be deposited with the RBI.

    Impact of hike in REPO and CRR in Banking

    A hike in these rates will bring almost equivalent hike in the interest charged by the banks to their customers. This will make Housing loans costly. If the RBI hikes REPO by 25 basis points, the rate of interest on your housing loan will be hiked by 0.25%. On the similar lines, interest rates on Personal loans and Vehicle loans also increases on fresh loans. Banks may or may not hike these rates for existing loans.

    Impact of hike in REPO and CRR in Stock markets

    There are two types of stock markets - Interest rate sensitive and Interest rate insensitive. There are some industries which depend on loans from banks for expansion. Such sectors which include Banking, real Estate and Infrastructure which are affected adversely if these rates are hiked.

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