Let us first understand the meaning of repo rate and reverse repo rate and then we’ll go deep into what it means to the common man
- Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds. It is the key instrument of monetary policy to control inflation
- Reverse Repo is the rate at which banks purchase government securities from RBI to lend it money and earn interest.
- MSF is an emergency borrowing (during cash shortage) by banks from RBI
- During inflation, RBI tends to increase repo rate. This will discourage banks to take money from RBI which in turn creates low cash reserves with the banks.
- So people will be discouraged to take loans from banks as banks now lend them at a high-interest rate citing the high repo rate.
- So the purchasing capacity of the consumer decreases thereby decreasing the demand in the market which in turn decreases the inflation in the market ( Afterall inflation is because of high demand and low availability)
- Now when repo rates are cut which means the interest rate at which RBI lends money to banks are decreased, banks readily take money from RBI and they give loans to consumers at lesser interest rates. This will, in turn, encourage consumers to take loans readily and thereby purchase goods from the market. Thus the spending capacity of the consumer increases, growth of the companies increases which leads to the growth of the whole nation.
- Coming to present situation, RBI has reduced the repo rates to 6.5%, a 0.25% cut against the expected 0.5% and reverse repo rate has been hiked by 0.5% to 6%
- While the CRR has been kept unchanged at 4%, MSF has been trimmed by 0.75% to 7%
- RBI expects the economy to grow by 7.6% in the FY2016-17 and has kept the inflation target at 5% for FY2016-17
For those of you who are wondering what Panama papers is, I will try to explain in as simple words as possible.
- Panama Papers are documents obtained from a Panama-based offshore services provider called Mossack Fonseca. The documents were received by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists (ICIJ) with the Organized Crime and Corruption Reporting Project (OCCRP).
- The cache of 11.5 million records shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars
- The leaked records — which were reviewed by a team of more than 370 journalists from 76 countries — come from a little-known but powerful law firm based in Panama, Mossack Fonseca, that has branches in Hong Kong, Miami, Zurich and more than 35 other places around the globe.
- The leaked data covers nearly 40 years, from 1977 through the end of 2015
- The data includes emails, financial spreadsheets, passports and corporate records revealing the secret owners of bank accounts and companies in 21 offshore jurisdictions, from Nevada to Singapore to the British Virgin Islands.
- These are among the findings of a yearlong investigation by the International Consortium of Investigative Journalists, German newspaper Süddeutsche Zeitung and more than 100 other news organizations.
- The files expose offshore companies controlled by the prime ministers of Iceland and Pakistan, the king of Saudi Arabia and the children of the president of Azerbaijan
- Most of the services the offshore industry provides are legal if used by the law abiding. But the documents show that banks, law firms and other offshore players have often failed to follow legal requirements that they make sure their clients are not involved in criminal enterprises, tax dodging or political corruption. In some instances, the files show, offshore middlemen have protected themselves and their clients by concealing suspect transactions or manipulating official records.
- The world’s best soccer player, Lionel Messi, is also found in the documents. The records show Messi and his father were owners of a Panama company: Mega Star Enterprises Inc. This adds a new name to the list of shell companies known to be linked to Messi. His offshore dealings are currently the target of a tax evasion case in Spain.
- Almost 500 Indians are owners of the shell companies purchased through Mossack Fonseca which include the famous Amitabh Bhachan and his daughter in law Aishwarya Rai Bachan who changed her ownership name to A Rai citing confidentiality reasons in her offshore company’s share owners list.
the above video clearly explains why it is illegal to have offshore companies.