Interest is fee, charge, paid of borrowed capital. Capital includes shares, money, consumer goods.
If very too little changing of federal bank of America, RBI, bank of Japan, Interest of our bank, changing into lows of RBI (Reserve bank of India), etc., we can looks too much affects International market & our stock market.
Repo Rate and Reverse Repo Rate:-
Before try to understand Repo and reverse Repo, need to understand important of reserve ratio.
CRR – Cash Reserve Ratio:-
CRR refer as balance banks must have keep on hand as cash which is determined by country’s central bank (For India Reserve bank of India) and the U.S. is the Federal Reserve. How much liquidity of cash money into market determination of authorities by Reserve Bank of India through declaring cash revere ratio in India.
According to determined laws of Reserve bank of India declared Reserve Ratio, all of country must have to keep Cash Deposit on hand as declared.
For example:- if the reserve ratio in the India is determined by the Reserve bank to be 3%, this means all banks must have 3% of their depositor’s money on reserve in the bank. State bank of India have deposits of 10,000crore. RBI declared that reserve of all banks has to require 3 % (CRR) on hand as Cash. State bank of India required has to 300crores on reserve deposit. As per this law, all banks have to keep 3% cash deposit form total deposit. After few months, RBI declared 50 bps CRR hiked from 3% it’s become 3.5% cash deposit. Other bank (SBI) must keep on hand cash deposit. State bank of Indian must have to keep 3.5%350cores as Cash deposit of 10,000. Suppose SBI bank has no 50crores rupees extra for CRR hiked. SBI bank needs to take load or borrow form Reserve Bank of Indian. Reserve bank gives to money on interest. This interest rate is known as Repo rate. If RBI needs to take money form other bank it knows as Reverse Repo.
Repo and Reverse Repo:-
If Repo is high, banks will be borrow money more form Reserve Bank. When Repo rate and cash reserve ratio is hiked. Liquidity of money into market will decrease. Liquidity of money market also influences to stock market. Prices of stock will fall according to hiked CRR.
For investors: - Keep eyes on Repo and CRR rate which are declared form Revere Bank of India. The Reserve Ratio affects the money supply in a country
For traders: - On this theory, Traders must keep on CRR and Repo of RBI, because the Reserve Ratio very soon affects to stock market.
For India:- Cash Reserve Ratio is 9% raised form 8.75, effective form 30/08/2008
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