reserve repo rate

           Reverse repo rate

Definition: Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

Description: An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market

Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for their holdings with the central bank. During high levels of inflation in the economy, the RBI increases the reverse repo. Or Reverse Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term. It is an important monetary policy tool employed by the RBI to maintain liquidity and check inflation in the economy. The Reverse Repo Rate helps the RBI get money from the banks when it needs. In return, the RBI offers attractive interest rates to them. The banks also voluntarily park excess funds with the central bank as it provides them with an opportunity to earn higher interest on surplus money. The Reverse Repo Rate is decided by the Monetary Policy Committee (MPC), headed by the RBI Governor. The decision is taken in the bi-monthly meeting of the Committee.

Repo Rate vs Reverse Repo Rate

Repo Rate vs Reverse Repo Rate is one of the most important topics that we need to understand. The difference can be listed as follows:

  1. Repo rate is charged against funds lent by the RBI to commercial banks and other financial institutions.The reverse repo rate, on the other hand, is the rate of interest that is offered by the central bank to the commercial banks who deposit funds in the RBI treasury.
  2. Repo rate is always higher than the reverse repo rate.
  3. Repo rate helps to control the inflation in the market. The reverse repo rate, on the other hand, helps to control the supply of money in the market.

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