About Repo Rate and Reverse Repo Rate

TNPSC Current Affairs - February 2018 by TNPSC Guru

About Repo Rate:

• Repo Rate is the rate at which commercial banks borrow money from Reserve bank of India against the securities or bonds of commercial bank.
• RBI used the Repo rate to control Inflation. If repo rate increased bank will borrow less and the credit creating capacity of bank will come down which ultimately reduce the money supply in the economy, thus help in controlling inflation.
• If RBI Increase its Repo rate, the reverse will happen.

About Reverse Repo Rate:

• Reverse Repo Rate is the rate at which Reserve Bank of India borrow money from Commercial Bank. In simple it is the rate offered by RBI to other banks to deposit their money in RBI.
• When the commercial banks generate excess money, they will choose to deposit money in RBI if the Reverse Repo rate is high comparing to interest rate on lending loans to customers. Because depositing money in RBI is safer comparing lending to customers.
• So it will make Customer to opt loan for higher interest for lesser money, which will control the supply of money in economy