The Hindu Business Line : Will the hikes hurt my wallet?

Reverse repo rate is the rate of interest that the RBI pays other banks from which it borrows money. Repo rate is the rate of interest that the RBI receives from the banks it has lent to.

The reverse repo rate tends to set the floor for the short-term rates in the system. All banks and financial institutions operate on borrowed money. Their costs go up — which they will in turn pass on to you, the customer — sometimes immediately and sometimes over a period of time. So brace yourself up — your car loans, home loans and consumer loans could cost more. Ditto for companies.

When the RBI hiked these rates in June, in a surprise move, yields on the 10-year benchmark government securities paper rose over the next few days by nearly one percentage point to levels of about 7.7 per cent. A month-and-a-half later they stand at about 8.25 per centnow.

The cascading effect of these rate hikes was felt in other markets too. Private banks such as ICICI Bank raised their home loan rates shortly after the earlier hike. Public sector banks such as Bank of Baroda said that while there were no plans to hike their prime-lending rate, they were negotiating higher rates for corporate customers.

Union Bank said that it would have to re-price its retail lending products such as home loans, auto loans and trade finance.

When the RBI borrows money through reverse repo, it is basically sucking out money from banks and leaving them with less money in their hands to lend. When the RBI wants to pump in more money to banks (and in turn encourage them to lend), it uses the repo tool to purchase securities or government paper from banks and leave them with some more cash.

The borrowing or the lending, through the reverse repo or repo, as the case may be, is for a very short duration — sometimes overnight, three days or a fortnight. Basically, these are collateralised borrowing and lending between the RBI and banks in the system.

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