Repo and Reverse Repo Rate

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Repo and reverse repo rate
These are the rates which are used by reserve banks (RBI in India) to inject or absorb liquidity from banking system.
Repo rate is the rate at which the RBI lends money to the commercial banks or the rate it which banks borrow money from RBI. When RBI increases repo rate borrowing from RBI becomes more expensive. RBI increases repo rate to make it more expensive for the banks to borrow money. If RBI reduces the repo rate means banks can borrow money at cheaper rates. The term repo comes from repurchase agreement. This is known as repurchase agreement because bank makes an agreement with reserve bank to repurchase bonds, which are kept with RBI for borrowing money to meet banks cash needs. This is the rate at which liquidity is injected in banking system by RBI.
Reverse Repo rate is the rate at which banks keep their money with the RBI or the rate at which RBI borrow money from commercial banks. The RBI uses this tool when it feels there is too much liquidity in the banking system. If RBI increases reverse repo rate means RBI is ready to borrow money from banks at higher rate of interest then banks would prefer to keep more money with RBI instead of making investment and providing loans at low interest rates. As a consequence of this loan interest rate will increase, that will help in controlling liquidity. Thus Reverse repo rate is the rate at which the central bank absorbs or draws liquidity from the banking.

What is cash reserve ratio – CRR
Banks require keeping a certain percentage of total deposits in form of cash.CRR is the amount which scheduled commercial banks have to keep with RBI (Reserve Bank of India).This ratio is decided by RBI and used to control liquidity. If RBI makes a decision to reduce CRR, then banks have to keep fewer amounts in form of cash with RBI. There will be more amounts available with commercial banks for lending and investment, now bank can reduce interest rates on various loans to utilize this excess

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