Reverse Repo Rate Meaning:
When a bank has excess reserves it deposits them to the RBI. RBI in turn pays some interest on the amount deposited by a bank that interest is called the Reverse Repo Rate.
In other terms, it is also said that when there is an excess flow of liquidity in the market or RBI needs money it borrows from banks on government securities at a specific rate of interest. This rate of interest is known as Reverse Repo Rate in India.
It is also known as Reverse Repurchase Option. In it, banks promise to resell government securities to the RBI. The RRR(Reverse Repo Rate) period can last for a day or seven days.
RRR allows banks to generate income in the form of interest.
Who decides Reverse Repo Rate?
RRR is always decided by RBI(Reserve Bank of India). It can also be known as the RBI Reverse Repo Rate.
Generally, the reverse repo rate is lower than the repo rate so that the proper flow of cash can be managed in the market.
Uses:
It is one of the crucial factors that help control the economy's growth and inflation.
Current Reverse Repo Rate:
The present Reverse Repo Rate of India is 3.35%. RRR is generally lower than RR.
| Type | Rate of interest |
|---|---|
| Repo Rate | 6.25% |
| Reverse Repo Rate | 3.35% |
Impact on the economy:
Whenever RBI tries to control the growth in the economy, it increases or decreases the flow of cash.
When there is a rise in the RRR flow of liquidity in the market declines as banks try to generate more income by depositing their reserves with the central bank.
As a result, customers are able to get fewer loans.
FAQ:
What is the difference between the repo rate and the reverse repo rate?
The Repo rate is one on which banks get loans from RBI while Reverse Repo Rate is the interest RBI gives to banks on its deposits.
What is the full form of RBI?
Related Articles: Statutory Liquidity Ratio (SLR Rate)
