Repo Rate and Reverse Repo Rate


 
 
Concept Explanation
 

Repo Rate and Reverse Repo Rate

Repo Rate and Reverse Repo Rate :

Repo Rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. When the repo rate increases, borrowing from RBI becomes more expensive. Therefore, we can say that in case RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate is the rate of interest at which the RBI borrows funds from other banks in the short term, and at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool whenit feels there is too much money floating  in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.

 
 


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