India : Rising Interest rate scenario
Why do banks jack up prices when reverse repo is increased by RBI ?
Reverse repo: When the RBI borrows money against its securities, the interest rate at which it does so is known as reverse repo. In other words, this is the rate the RBI pays banks when they lend money. This rate has gone up from 4.75% to 5.25%(Recent Credit Policy announcement)
Repo: When the RBI lends money to banks against their securities, it is known as the repo rate. This rate is 6%. This is what the banks pay the RBI when they borrow money. This rate has not changed.
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It means the RBI is willing to pay more now for the money it borrows and clearly signals a shift towards a higher interest rate._