{"id":13039,"date":"2021-11-06T13:18:23","date_gmt":"2021-11-06T13:18:23","guid":{"rendered":"https://www.5paisa.com/finschool/?post_type=finance-dictionary\u0026#038;p=13039"},"modified":"2024-10-14T22:30:54","modified_gmt":"2024-10-14T17:00:54","slug":"key-rates","status":"publish","type":"finance-dictionary","link":"https://www.5paisa.com/finschool/finance-dictionary/key-rates/","title":{"rendered":"Key Rates"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002213039\u0022 class=\u0022elementor elementor-13039\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-5cf01523 elementor-section-boxed elementor-section-height-default elementor-section-height-default\u0022 data-id=\u00225cf01523\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container elementor-column-gap-default\u0022\u003e\u003cdiv class=\u0022elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-6a6ca6ef\u0022 data-id=\u00226a6ca6ef\u0022 data-element_type=\u0022column\u0022\u003e\u003cdiv class=\u0022elementor-widget-wrap elementor-element-populated\u0022\u003e\u003cdiv class=\u0022elementor-element elementor-element-7ec17644 elementor-widget elementor-widget-text-editor\u0022 data-id=\u00227ec17644\u0022 data-element_type=\u0022widget\u0022 data-widget_type=\u0022text-editor.default\u0022\u003e\u003cdiv class=\u0022elementor-widget-container\u0022\u003e\u003cp\u003eThe specific interest rate that determines bank lending rates and the cost of credit for borrowers is known as Key Rate or Repo Rate. The two key interest rates in India are the Repo rate and Bank Rate. These are rates that are set, either directly or indirectly, by the Reserve of Bank of India (RBI), these influence lending and the supply of money and credit in the economy.\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eUnderstanding Key Rates\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003eA bank or other institution uses the key rate to determine the interest rate on debt. In India, there are two key rates: Repo rate and Bank Rate. How Does a Key Rate Work? To understand key rates, it is important to understand that banks derive income from making loans. When lending generates profit for banks, they are motivated to lend as much of their deposits as possible. This is a problem when a large number of depositors suddenly want to withdraw their money. To prevent the panic that would naturally occur in this situation, RBI has made provisions for legal reserve requirements which requires banks to keep a certain percentage of their deposits in cash and deposit minimum percentage of banks money with the central bank\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eUses Of Key Rates\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cstrong\u003eMonetary Policy  \u003c/strong\u003e\u003c/p\u003e\u003cp\u003eAnother important aspect of the key rate is that it serves as the primary tool used by the central bank to carry out monetary policy. The key rate directly influences other interest rates used by consumers, such as credit card rates, personal loans, mortgage loans, and more. Interest rates influence the economy through incentives for borrowing and saving. If interest rates are high, people have an incentive to save money. Conversely, if interest rates are low, people have an incentive to borrow and spend money. Because of this relationship, interest rates are used in monetary policy to shape the macro economy.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eReserve Requirements\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eBecause the key rate is the target rate of borrowing between financial institutions, it is also a significant component used in meeting the reserve requirement. The reserve requirement is a specified percentage of cash that financial institutions must keep on deck to meet liquidity needs, such as customer requests to withdraw funds. The reserve requirement is in place to mitigate insolvency. The key rate is used by financial institutions to borrow cash if they dip below the reserve requirement.\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eSpecial Considerations\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cstrong\u003eOpen Market Operations\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eOne of the chief tools used by the Government to implement monetary policy is Key rates. When the RBI wants to expand the money supply in the economy, it will typically buy bonds on the open market with newly created money using the funds to increase the money supply in the economy. When the Central Bank is in a contractionary phase, it will sell the government bonds in the open market to decrease the money supply which does helps in controlling inflation. Sale of securities by central bank reduces the reserves of commercial banks it adversely affects the bank’s ability to create credit therefore decrease the money supply in the economy. Whereas, purchase of securities by central bank increases the reserves and raises the bank’s ability to give credit.\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eWhy Does A Key Rate Matter?\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003eAn increase in the Repo rate or Bank rate discourages banks from borrowing to meet reserve requirements, causing them to build up reserves (and thus lend out less money). A reduction in the Repo rate or Bank rate has the opposite effect: it encourages banks to borrow to meet reserve requirements, which makes more money available for lending.\u003c/p\u003e\u003cp\u003eAccordingly, the Central Bank can trigger a change in the Repo rate to control credit in the economy, That is also a major function central bank to control Money Supply and Credit.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eThe Repurchase Rate\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eWhen a bank is unable to meet the reserve requirement, it can borrow those funds from another bank or directly from the RBI. The rate at which this short term unsecured loan is available is known as Repo rate.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eThe Reverse repo Rate\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eThe interest rate banks charge each other on loans used to meet reserve requirements the reverse repo Rate. It is often confused with the Repo Rate. When a bank is unable to meet the reserve requirement, it can get a reverse repo loan. These loans are usually made through brokers who specialize in such transactions, or they are made directly between the banks themselves.\u003c/p\u003e\u003ch5\u003e\u003cstrong\u003eWhat Is Key Rate Duration?\u003c/strong\u003e\u003c/h5\u003e\u003cp\u003eKey rate duration is the change in maturity value of a debt security in respect to the 1% or 100 bps change in its yield.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e","protected":false},"excerpt":{"rendered":"\u003cp\u003eThe specific interest rate that determines bank lending rates and the cost of credit for borrowers is known as Key Rate or Repo Rate. The two key interest rates in India are the Repo rate and Bank Rate. These are rates that are set, either directly or indirectly, by the Reserve of Bank of India … \u003ca title=\u0022Key Rates\u0022 class=\u0022read-more\u0022 href=\u0022https://www.5paisa.com/hindi/finschool/finance-dictionary/key-rates/\u0022 aria-label=\u0022Read more about Key Rates\u0022\u003eRead more\u003c/a\u003e\u003c/p\u003e","protected":false},"author":1,"featured_media":13169,"parent":0,"menu_order":315,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"class_list":["post-13039","finance-dictionary","type-finance-dictionary","status-publish","format-standard","has-post-thumbnail","hentry","finance-dictionary-terms-k"],"acf":[],"_links":{"self":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary/13039","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary"}],"about":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/types/finance-dictionary"}],"author":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/users/1"}],"replies":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/comments?post=13039"}],"version-history":[{"count":3,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary/13039/revisions"}],"predecessor-version":[{"id":62534,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary/13039/revisions/62534"}],"wp:featuredmedia":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media/13169"}],"wp:attachment":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media?parent=13039"}],"curies":[{"name":"wp","href":"https://api.w.org/{rel}","templated":true}]}}