You may have frequently come across terms like Repo Rate and Reverse Repo Rate while watching TV or even while reading news paper. These are most commonly used tool by the RBI to control Inflation and to recover the economy during recessionary environment.
The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI.
A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.
When the banks need money they lend it from RBI at “repo rate” higher the repo rate the lower the banks will lend. Reverse repo rate is the rate at which RBI borrows money from the banks generally done to avoid excessive lending by the banks.