How It Fix the Repo Rate?

A repo rate is coined in two different ways. In financial markets, the repo rate is the excess over the amount received at the time of maturity of a repo transaction and the cash paid at the time of agreement. The repo rate is fixed after taking into consideration the type of instruments that had been offered in the repo transaction, the maturity period of the repo, and the credit standing of the parties involved. If the instruments are perceived as risk-bearing ones, the repo rate tends to be very high.

Central banks of all the countries also conduct repo and reverse repo operations. The central banks buy the securities from commercial banks, thus enhancing the reserves available with the commercial banks. Later, they withdraw the funds at the specific maturity time and return the securities. This is essentially done by the central banks to increase the liquidity in the market, with the intention of boosting up spending for achieving higher economic growth. They also conduct reverse repo operations, which are the opposite of repo in all aspects. A brief analysis of the target rates of various central banks will give a better idea of the rationale behind their market operations.

The Reserve Bank of Australia has kept its target cash rate at 6.25%. The Central Bank of Brazil’s selic target rate is 13.25%. The overnight target rate of Bank of Canada is 4.25%. The European Central Bank has kept its deposit facility rate at 2.50%, the main refinancing operations rate at 3.50% and marginal lending facility rate at 4.50%. The Reserve Bank of India’s PLR rate is 10.25%-10.75%, deposit rate is 5.25%-6.25% and savings bank rate is 3.5%. The Bank of Japan kept its uncollateralized overnight call rate at 0.25%. The Bank of England’s current bank rate is 5.25%. The Federal Reserve of the United States also kept its intended federal funds rate at 5.25%.

It can be seen from the above that various central banks have different nomenclatures for their funds rates. The rates vary widely from a low of 0.25% in Japan to 13.25% in Brazil. The rates are determined by the central banks, taking into consideration the prevailing economic growth conditions, inflation rates, and several other economic criteria. They also determine repo rates in accordance with their set goals.

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