The RBI recently raised the repo rate (from 6.25% to 6.5%) and the reverse-repo rate (from 5.25% to 5.5 %). The reasons behind the move are better explained here. This is I think the third such hike in the last one year.
However, the hike in repo rates poses a difficult question in my mind - why is the bank rate (at 6 %) lower than the repo rate (6.5%) ? Does it mean that borrowing for a shorter term (via a repo transaction) from RBI will be more expensive than borrowing over a period that is greater than say 1 day (via the traditional bank rate) ?
Isn't the yield curve still positive in India ?
For those who do not understand what is a repo rate or reverse-repo rate -
Bank rate, sometimes also referred as rediscount rate, is the rate of interest which a central bank charges for loans and advances made available to commercial banks and other financial intermediaries. Changes in bank rate is widely used as a tool by the central banks to control the money supply. Current rate - 6%.
Repurchase agreements (Repos) are financial instruments used in the money markets. A more accurate and descriptive term is Sale and Repurchase Agreement, since what transpires is sale of securities now for cash by the bank to the RBI, with the promise made by the bank to the RBI of repurchasing those securities later (with the bank paying the requisite implicit interest to the RBI at the time of repurchase - the implicit interest rate is known as the repo rate). Current rate - 6.5%.
A Reverse Repo is a transaction in which the bank lends money to the RBI (which is why the reverse repo rate is lower than the repo rate) against securities put up by the RBI. Current rate - 5.5%.