- 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
- To control the money supply in the economy.
- 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.
- 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%).