Repo Rate
What is Repo Rate?
This is the rate at which central bank of a country (e.g. “Federal Reserve” for USA, “Reserve bank of India” for India, “Central bank of Russian Federation” for Russia) lends money to commercial banks in case of any deficiency / shortfall of funds. This is one of the important tools to control inflation rate in a country.
How does it work?
If this rate is increased, then
1. Banks will increase the lending rate for general customers.
2. Availing loans become expensive.
3. Customers will start postponing their loan and hence money supply in the market gets reduced.
4. Excess money supply in the market is one of the major reasons for increasing Inflation rate, hence this gets controlled.
What is Reverse Repo Rate?
As the name suggests, this is just opposite to Repo rate. This is the rate at which Central bank of a country borrows money from commercial banks. In a reverse repo transaction, banks purchase government securities form Central bank and lend money to the banking regulator, thus earning interest. This is again an important tool used by Central Bank to curtail inflation.
How does it work?
If rate is increased, then
1. Banks prefer to park more money with Central Bank due to avail benefit of increased interest rate.
2. This reduces the money available for lending purpose to general public.
3. Money supply in the market gets reduced. Hence inflation rate is reduced.
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