What is repo rate and reverse repo rate?

What is repo rate and reverse repo rate?

Repo rate and reverse repo rate are both monetary policy tools used by the central bank of a country to influence the amount of money in circulation in the economy and to control inflation. While repo rate is the rate at which the central bank lends money to commercial banks, reverse repo rate is the rate at which the central bank borrows money from commercial banks.

What is Repo Rate ?

When the central bank wants to increase the amount of money in circulation, it lowers the repo rate. This makes it cheaper for commercial banks to borrow money from the central bank, which in turn enables them to extend more credit to consumers and businesses, thereby increasing the money supply in the economy. Conversely, when the central bank wants to reduce the amount of money in circulation, it raises the repo rate, making it more expensive for commercial banks to borrow from the central bank, and thereby decreasing the amount of credit they can extend.

What is Reverce Repo Rate?

On the other hand, when the central bank wants to reduce the amount of money in circulation, it raises the reverse repo rate. This makes it more attractive for commercial banks to deposit their excess funds with the central bank, thereby reducing the amount of money in circulation in the economy. Conversely, when the central bank wants to increase the amount of money in circulation, it lowers the reverse repo rate, making it less attractive for commercial banks to park their excess funds with the central bank, and thereby increasing the money supply in the economy.

In India, the Reserve Bank of India (RBI) determines the repo rate and reverse repo rate as part of its monetary policy. The repo rate and reverse repo rate are typically announced in the RBI’s monetary policy statement, which is issued at regular intervals.