Education and Career Forum

what is repo rate and reverse repo rate and why RBI use that??
every day i come across these words in news papers.

RBI(Reserve Bank of India) is the central bank or apex bank in India. It may perform various activities for the economic development of the country.

Repo rate is the rate at which RBI lends money to the Commercial Banks. The purpose why the banks borrow from RBI is to meet their short term needs. RBI lends money to these banks against securities.

Generally the repo rate at which RBI lends money to the banks is lower than the interest rates in the market.

So, if repo rate increases, is becomes expensive for the banks to borrow from RBI and vice versa.

Reverse Repo rate is the rate at which banks park their excess liquidity with RBI. Instead of investing in any investment avenues, banks park their additional liquidit with RBI.

So, if repo rate increases, Banks will get more interest rate upon their liquidity parked with RBI.

The reason to change repo and reverse repo is to come down the inflation. Inflation is the rate at which cost of living increases and further cost of living is what it costs to meet your basic needs.

If the inflation increases, the purchasing power of individuals decreases. So, in order to contol the inflation and to maintain money supply in the country RBI involve in changing repo rate and reverse repo rate.

WHAT IS THE PERCENTAGE OF REPO AND REVERSE REPO RATE IN TEH YEAR 2012