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repo rate

Sakyasingh Rath (student) (56 Points)

22 October 2008

Hello Sirs,

Would anybody please tell me how cut in repo rate helps the control of inflation and liquidity in the share market.

Do not you think that it will help the influential customers of the banks ?

Thanking You in advance. Sakyasingha Ratho

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4 Replies

Rajesh Reddy I V (Debt Capital Market) (28 Points)
Replied 22 October 2008

Repo Rate cut is not a tool to control the inflation. In fact rates will be increased to contain the inflation. when the rates are increased money supply will decrease and demand side inflation is controlled. Rate cut coupled with CRR cut will improve liquidity as the availability and cost of funds will increase which in turn increases the lending by banks. Definitely it will improve the premium customers of banks as many banks stopped lending for working capital limits due to liquidity crunch.

Regards

Rajesh

Prabeer (B. COM (H) CA & CS Final) (5484 Points)
Replied 22 October 2008

I agree with Mr. R. Reddy.

CA CS CIMA Prakash Somani (Landmark Group) (23502 Points)
Replied 22 October 2008

The sole purpose of govt behind reducing repo rate is to boost investment and to flow money into the market.

It is hard to say how much liquidity comes to market. the reason is if banks borrow from RBI and lend to institutions than only this money will come into the market.

If banks show no interest in borrowing and lending the money to institutiones than it may not have impressive results.

Whatever be the cause this is aq good step taken by govt to boost liquidity into indian market to curb inflation, to incaurage investors to be faithfull, to lend more money etc etc.

Repo rate is diff from CRR bcz CRR has directly impacted the banks positvely as the banks neednot to maintain the cash reserve with RBI to the extent of CRR cut.

Rajesh Reddy I V (Debt Capital Market) (28 Points)
Replied 22 October 2008

You are right prakash, it will take sometime for the banks to do the borrowing to corporates. Banks have surplus liquidity right now. No bank has borrowed from RBI under Repo window this week, the reason being the call rates are hovering around 6% and current repo rates is 8%. Infact many banks are parking their surplus funds under reverse repo with RBI. This is in contrast to the situation a week ago, when banks used to borrow heavily from RBI every day.