Banking terms in news: Reverse Repo rate

About:

  • As the name suggests, it is the reverse of the Repurchase rate.
  • So, it is the rate at which RBI borrows from the commercial banks.
  • It is again a monetary policy instrument

Purpose:

  • To control the money supply in the economy.

Significance:

  • It is an instrument different from others in the sense that commercial banks are at an advantage here–>as they receive an interest rate on their funds parked with RBI here.
  • It is an important tool to control the money supply and other related factors like inflation, investment ,and growth.

Conceptual Understanding:

  • If Reverse Repo increases:
    • Banks will prefer parking their funds with RBI as they would be getting greater interest rates for these funds.
    • This will absorb the liquidity from the market as the banks would have lower credit availability to lend.
    • Investments may reduce
    • Growth may slow down.
    • Inflation could be controlled.
  • If Reverse Repo reduces(following ‘may‘ happen; even if the reverse repo reduces, there is still a scope of getting the interest on parked funds–>so banks may still prefer that )
    • Banks would not prefer parking their funds with the RBI.
    • This would increase the amount of lending credit.
    • Lower interest rates.
    • greater lending.
    • more inflation.
    • more investment.
    • greater growth rate.

Current Reverse Repo :  It is generally, 100 basis points lower than the Repo Rate.However, the current value of Reverse Repo is 6%(while the repo rate is 6.5%).

 

 

 

 

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