REPO and Reverse REPO rate

What is Repo Rate?

1. ​The interest rate at which the RBI lends money to commercial banks is called Repo rate. Whenever banks face a financial crunch or shortage of funds, they can borrow money from the RBI as per the Repo rate by selling their securities. ​

2. A reduction in Repo rates helps banks get money at a cheaper rate. Repo rate in India is fixed by the Reserve Bank of India. It is beneficial for short term financial crisis.

​3. It is one of the powerful tool for RBI to control the money supply, liquidity and inflation in the country.

​4. If the economy needs less money supply, RBI increases the Repo rate, making it difficult for banks to borrow funds. Similarly to move funds into the economy RBI may reduce Repo rate, encouraging Banks to borrow funds.

5. ​Repo rate usually used to control inflation.

What is Reverse Repo Rate?

1. ​Reverse repo rate is the rate at which the RBI borrows money from commercial banks.

​​2. Banks are always joyful to lend money to the RBI which is safer than lending it to their account holders or other companies.

​3. Reverse repo rate is used to control money supply in the market.

4. ​An increase in reverse repo rate leads banks to put more funds with the RBI to earn higher interest on surplus cash available with them.

5. ​It is a powerful tool used by the RBI to reduce the excess money at the banking system. 

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