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    Reverse Repo Rate

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    vaishximi

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    © All Rights Reserved
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    Reverse Repo Rate

    Uploaded by

    vaishximi
    2 views2 pages

    Original Title

    Reverse Repo rate

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    2 views2 pages

    Reverse Repo Rate

    Uploaded by

    vaishximi

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    What is Reverse Repo Rate?

    Reverse repo rate is said to be that rate of interest at which the


    central bank (RBI in India) borrows money from the commercial
    banks for a short term. It helps the central bank to have a ready
    source of liquidity at the time of need. RBI offers great interest rates
    in return for the amount supplied by the commercial banks.
    Commercial banks also keep the excess funds that they receive with
    RBI as it is considered safe. The added benefit is that RBI will also pay
    interest, which gives the banks an option to earn interest on their
    idle money.

    Reverse Repo Rate and Money Flow


    When there is an increase in the reverse repo rate, it allows
    commercial banks to push their additional funds into the safe
    custody of the RBI for a short term and also earn attractive interests
    for the same. This step brings about a reduction in the liquidity of the
    banks.
    RBI accepts the excess money from the banks by providing
    government securities as collateral. This is facilitated using LAF
    (Liquidity Adjustment Facility)

    Impact of Reverse Repo Rate on Economy


    The reverse repo rate has an impact on the economy as when the
    reverse repo rate is increased banks deposit their surplus funds with
    RBI in order to gain interest.
    The result is that the economy experiences reduced money flow, the
    banks find it more feasible to deposit the money in the central bank
    rather than providing it to individuals or businesses which results in
    boosting the value of the rupee.

    1
    Similarly, inflation is controlled by RBI by increasing the reverse repo
    rate, and when the situations are perfect for increasing the inflation,
    RBI then cuts the reverse repo rate and repo rate so as to inject
    liquidity into the economy.
    The impact of change in reverse repo rate can be seen in home
    loans, as an increased reverse repo rate will encourage banks to
    invest their surplus funds in low-risk government securities instead
    of providing credit to individuals.
    It causes home loans to become dearer, while the opposite effect is
    seen when the reverse repo rate is decreased.

    Difference between Reverse repo rate and Repo rate


    The basic differences between reverse repo rate and repo rate are as
    follows

    1. A high reverse repo rate dries up the money supply while a high
    repo rate results in injecting more liquidity in the system.
    2. The reverse repo rate is always lower than the repo rate.

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