Repo rate is the rate at which the central bank of a country
(RBI in case of India) lends money to commercial banks in the event of any
shortfall of funds.
Definition: Repo rate is the rate at which the
central bank of a country (Reserve Bank of India in case of India) lends money
to commercial banks in the event of any shortfall of funds. Repo rate is used
by monetary authorities to control inflation.
Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.
Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.
Note:- Repo rate – 7.75
Reverse Repo Rate
Reverse repo rate is the rate at which the central bank of a
country (RBI in case of India) borrows money from commercial banks within the
country.
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.
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.
Note:- Reverse Repo rate – 6.75
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