The rate at which the central bank lends money to commercial banks keeping the treasury bills as security is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage
of funds they can borrow from the BB. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. The repo rate in Bangladesh is similar to the discount rate in the US. Reverse Repo rate is the rate at which the central bank borrows money from commercial banks. Banks are always happy to lend money to the BB since their money is in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the central bank to earn higher returns on idle cash. It is also a tool which can be used by the BB to drain excess money out of the banking system. The Bangladesh Bank (BB) has slashed its interest rate on repurchase agreement (repo) and reverse repo by 50 basis points. The rate was cut after nearly four years aiming at boosting fresh investment particularly in productive sectors, officials said.
The interest rate on repo auction came down to 7.25 per cent from 7.75 per cent while that on reverse
repo was re-fixed at 5.25 per cent from 5.75 per cent.
The revised interest rates on both repo and reverse repo will come into effect from February 1, a central bank circular said Thursday.