Reserve Bank of India cuts Repo Rate by 0.25%, Sensex hits 30,000 mark for first time.

04 MArch 2015 :: Reserve Bank Governor Raghuram Rajan’s second rate cut in less than two months sent Indian stock markets to record highs on Wednesday. The Sensex jumped over 400 points to edge above 30,000 for first time ever as the RBI lowered repo rate by 25 basis points to 7.5 per cent.

 This was the second rate cut this year that took place outside of the RBI’s scheduled policy review meetings.

Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds.

 Definition : Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

 Description : In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

 The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.