Repo rate and reverse repo rate are two terms discussed quite often in the Indian economy. What do they exactly mean?
A Repo rate is the rate at which financial institutions borrow money from the RBI by selling their securities. They borrow funds when they experience a shortage due to some statutory measures.
This is one of the ways RBI tries to manage inflation. Repo rate affects the interest rate people pay for their loans and even affects the amount of EMIs.
What is Reverse Repo Rate?
The reverse repo rate is also a popular mechanism used in India. It is a factor restricting the buying power of an investor. When excess liquidity is available in the market, the Central Bank of India takes loans from banks.
Banks in India receive interest for their funds held with the RBI. The reverse repo rate is increased in response to high levels of inflation in the country. In turn, banks put a large amount with the RBI to earn a bigger return. However, in this process, customers are not left with much funds for borrowing from banks.
When the reverse repo rate is high, people get loans at a higher rate of interest in an attempt to mitigate the risks of defaults.
What is KYC?
KYC refers to Know Your Client or Know Your Customer. It is a mandatory process banks use to verify their customers’ identity at the time of account opening and later at regular intervals. KYC verification at banks involves actions that ensure the clients are genuine.
In India, eKYC is a process where customer information is captured digitally from government-issued IDs. As 99 percent of the population has a digital identity, eKYC verification is popularly followed in India for online identity verification.
The eKYC process is considered to be highly feasible as it relies on Artificial Intelligence to deliver optimum accuracy.
The current repo rate is 4% in India while the reverse repo rate is 3.5%. Whenever there is a change in these rates, you can see impacts across the economy.
