Question { State Bank Of India SBI, 142614 }

What is meant by Repo Rate and Reverse Repo Rate.

Answer

Repo (Repurchase) rate is the rate at which the RBI lends
shot-term money to the banks. When the repo rate increases
borrowing from RBI becomes more expensive. Therefore, we
can say that in case, RBI wants to make it more expensive
for the banks to borrow money, it increases the repo rate;
similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their
short-term excess liquidity with the RBI. The RBI uses this
tool when it feels there is too much money floating in the
banking system. An increase in the reverse repo rate means
that the RBI will borrow money from the banks at a higher
rate of interest. As a result, banks would prefer to keep
their money with the RBI