What is Repo Rate and Reverse Repo Rate?
The repo rate and reverse repo rate are two critical tools employed by the Reserve Bank of India (RBI) to manage inflation, stabilize the economy, and ensure financial stability. These rates influence the cost of borrowing for commercial banks, which in turn impacts interest rates, money supply, and overall economic activity. Through adjustments in these rates, the RBI can regulate liquidity and influence the flow of funds within the financial system, making them key elements of India’s monetary policy framework.
Parameter | Repo Rate | Reverse Repo Rate |
Definition | Interest rate at which RBI lends to commercial banks | Interest rate at which RBI borrows from commercial banks |
Role | RBI acts as the lender | RBI acts as the borrower |
Parties Involved | RBI (lender) and commercial banks (borrower) | RBI (borrower) and commercial banks (lender) |
Purpose | Control money supply, manage inflation, influence borrowing costs | Manage excess liquidity, absorb surplus funds from banks |
Impact on Economy | Lowers repo rate to encourage borrowing, raises it to discourage borrowing | High reverse repo rate reduces liquidity, increases lending rates |
Interest Earnings | RBI earns interest on loans provided to banks | RBI pays interest on funds borrowed from banks |
Role in Financial Markets | Provides liquidity during financial stress | Absorbs excess liquidity from the market |
Role in Monetary Policy | Expansionary tool to stimulate economic activity | Contractionary tool to absorb excess liquidity and control inflation |
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