Hello good people's
Lot of people asked in mail that how central or reserve bank manages inflation , money supllies in practical. So you are going to learn all these way by which government do this
So our topic is
How reserve bank controls supply of money in economy of country
Or
How centrel bank control inflation rates and investment in industries
So first of all we have to understtand how inflation happens , so it is basic thing that if case quantity in market increases then it results that buyers are ready to pay more amount for certain product and services. Does is demand increases then price increases.let me give you an example assume that someone is selling a land area and there are three buyers for an average price of 10 lakh in normal economy
Now if ke sellability increases then buyers can pay more amount than actual price i.e. 11 or 12 lakh something here inflation is happened because the price of same plot increased due to cash availability. Therefore in simple way we can say that
"Increase the amount of money in market economy increases inflation "
so you can find basic idea of Reserve bank or monetary authorities that they have to just control the availability of money in economy. now question arrives that how monetary authorities or Central banks clontrols money available in economic system or market. So Here role of repo rate arrives . Actually repo rate is a tool of Central banks which they uses to control availability of money in cash market. So let's start understanding repo rate
WHAT IS REPO RATE
The full form of Repo is repurchasing option. Full form doesn't make much sense but it is sensefull.
repo rate is a rate of interest in which bank take money from monetary authorities in shortage of money. It's that simple banks also take interest ,strange!, But they do not take loan for personal needs they need loan to fund businesses and industries or they take loan to give loans. They just act as an commission agent . banks also have to give securities to RBI for loan . They give loan on liquid assets such as blazer with gold , unmature fds, Treasure funds etc, these loans have a tenure of overnight for one day but but Bank have to pay interest of per hour and minutes on them. from this you can get basic idea of why bank are able to get more interest in FD then amount in savings account because they uses our money to circulate money in bank.thus is a summary of repo rate it is rate of interest which banks pays to government when they are in need of overnight and one day cash by giving their securities to them
now moving onto another concept that is reverse repo rate which is in reverse direction of repo rate.
WHAT IS REVERSE REPO RATE.
reverse repo rate is rate at which bank gives money to monetary authorities RBI in India when they are having extra money and they want to earn interest on it but the change here from repo rate is that banks cannot demand for securities in exchange of loan because RBI itself regulates and insures security of money in economy.so Bank URN and short term interest on that here Bank earns from your money through safest possible way means they are earning interest from your FD and insurances.
So so till now you are known to all terms and definitions of Repo and reverse repo now let's understand how they Control Money available in your pocket and rate of inflation from this.
HOW BANKS CONTROL MONEY SUPPLY IN ECONOMY OR HOW MONETARY AUTHORITIES OR RBI CONTROL INFLATION RATES
Facebook knows Repo and reverse repo rate are decided by monetary authorities . These rates are only financial instruments or tools to control money supply.
Inflation or price increase depends on quantity of liquid cash available in market . If more quantity of money is in market then people can afford high price to buy a a specific thing this results in inflation .To control the inflation rate the RBI have to decrease money supply in economy. For this objective RBI make it hard to get money to banks.if bank will not have enough money then amount of liquid cash will be decrease in market and inflation get controlled. RBI increases repo rate here is game of repo rate. If RBI increases repo rate then Bank have to pay more interest on taking loan from RBI. If banks have to pay more interest then they will try to not take money with more interest or will find ways to have money by public investments. This results in downfall of cash availability in market . As RBI itself not supplying money in public and banks make efforts to put public money in banking system , Inflation gets controlled . Here topic arises that if banks have enough money to run then they will not demand for any loan from RBI ( for india ) and inflation rate will be as it is, but here is a thing which we knows reverse repo rate . RBI increases reverse repo if debt increases banks can get more interest on their money by investing it in RBI comparing to Industrial Investment with least risk. So industries and public wallets are in shortage of money . And banks strategy are also clear that if they can earn money by giving it to RBI then why they will invest it in public and industrial sector . This decreases cash availability of money in market all money is in hand of RBI.
Monetary authorities does Converse of this if cash availability of market decreases much then normal level then they a decrease repo rate which results in bank having more convenience to get money from RBI and money supply in market increases and in second case if banks have enough money to circulate and they do not demand for money from RBI then RBI decreases reverse repo rate now bank have only option to invest in public sector as interest rate is not that higher on RBI.
So in summary inflation happens then monetary authorities or RBI increases repo rate and reverse repo rate and if cash available in market decrease then Bank decrease repo rate and reverse repo rate
PRESENT REPO RATE AND REVERSE REPO RATE IN INDIA
The RBI recently reduced the important policy rates by 25 basis points on 6 June 2019 at a monetary policy review meeting. The current repo rate as on 6 June 2019 is 5.75%.The reverse repo rate has also decreased from 5.75% to 5.50%
I hope you liked amd understood this blog. Comment down or mail at dhirajpatel234@gmail.com if you have any query, suggestion or suggested blog topic.
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