Repo rate and Reverse Repo rate

Why in news?

• Recently Monetary Policy Committee (MPC) of RBI kept the repo rate unchanged at four per cent.

Repo rate and Reverse Repo rate:

• Repo rate is the rate at which RBI lends to its clients generally against government securities.
• Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
• Reverse repo rate is the rate at which RBI borrows money from the commercial banks.
• The increase in the repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.
•  As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in repo rate and reverse repo rate is a symbol of tightening of the policy.

PRELIMS QUESTION

Consider the following statements regarding repo rate:
1.Repo rate is the rate at which RBI borrows money from the commercial banks.
2.Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
Which of the statements given above is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer to Prelims Question