Reverse Repo Rate

It is the rate of interest at which the Reserve Bank of India borrows funds from commercial banks within the country for the short term. Commercial banks in India keep their surplus money with the RBI as it is safe and earns them a good rate of interest as well.

What are the features of Reverse repo rate?

Some key features of Reverse repo rate are :
1. It is a monetary policy tool used to control money supply in the economy.
2. An increase in reverse repo rate means lower liquidity in the economy as more banks will invest with the Central bank.
3. A decrease in reverse repo rate will mean higher liquidity in the economy as banks will lend more to individuals and enterprises.
4. Reverse repo will be lower than the repo rate.

Why is Reverse repo rate important?

Reverse repo rate is used by the RBI for controlling the money supply in the sy­stem, as
1. Banks would be more inclined towards parking funds with RBI as it is safe and earns good interest. This results in lower liquidity in the system.
2. In order to control inflation, RBI increases the reverse repo rate, so more banks will park money in safety of RBI than lend. This reduces the money supply in the system, thus controlling inflation.
3. The rupee may strengthen due to high reverse repo rate as it will again reduce the supply of money in the economy.