EXPLAINED: What is repo rate, reverse repo rate and MSF; Learn how it affects interest rates of your loan

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Updated: Feb 07, 2019 12:49 PM

The Reserve Bank of India (RBI) has various monetary policy tools which affect the interest rates. Repo rate, Reverse Repo rate and MSF are some quantitative tools used by the central bank to affect the money supply in the economy.

The Reserve Bank of India (RBI) has various monetary policy tools which affect the interest rates. Repo rate, reverse repo rate and MSF are some quantitative tools used by the central bank to affect the money supply in the economy.

Repo rate, also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. This in turn, raises the interest rate in the economy and therefore reduces the total money supply.

If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.

Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. The central bank uses this tool to change the money supply in the economy.

An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies etc) which is considered risky.

ALSO READ: RBI cuts repo rate by 25 bps, but why it may not reflect in your EMIs anytime soon

Marginal Standing facility (MSF) – It is a special window for the commercial banks to borrow from the RBI against approved government securities, in case of an emergency such as an acute cash shortage. MSF rate is generally higher than Repo rate.

An increase in the MSF rate leads to higher borrowing cost for the banks and thus, reduces money supply in the economy.

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