What is reverse repo rate?
Reverse repo rate is the rate at which commercial banks lend funds to the RBI by purchasing securities from it. It is a monetary policy instrument utilized by the Reserve Bank of India (RBI) to control liquidity in the economy. This rate sets a floor for the market interest rates and is thus one of the most important tools used by central banks to manage inflation, investment cycles, and economic growth.
Increase and Decrease in Reverse Repo Rate
When the reverse repo rate is increased, it signals that money needs to be taken out of circulation, as banks can receive more money when they purchase securities from RBI than they would when they lend out their funds to other financial institutions or businesses. This results in an overall decrease in available credit and money supply leading to an increase in interest rates across the board.
On the other hand, decreasing this rate makes borrowing cheaper for companies and individuals, ushering in more credit activity and encouraging investments while also reducing inflationary pressures on prices.
Difference between repo rate and reverse repo rate
The repo rate, also known as the repurchase rate, is the interest rate at which commercial banks can borrow money from the central bank for short-term liquidity needs. Conversely, the reverse repo rate is the interest rate at which commercial banks lend funds to the central bank.