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Meaning of Repo rate and Reverse repo rate

Reserve Bank of India or also known as Banker’s Bank is only Central Bank of India who controls the banking in India and makes monetary policies for the supply of money (Indian rupee) in economy and these Monetary policy help RBI to regulate banking system and there are various instruments of RBI’s monetary policy which RBI uses to control the money supply. And Repo rate and reverse repo rates are the two basic instruments of RBI’s monetary policy which RBI uses to control the banking system. So what do these two rates mean?

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What is Repo Rate?

Repo rate is a combination of two words “Repo” and “rate” in which Repo stands for “Repurchase” and is a short term (Max. 90 days) borrowing instrument issued by RBI (Reserve Bank of India) to commercial banks when they need money to borrow and the interest charge on that borrowing is known as Repo Rate. And in India generally, repo rates are cut down by central banks when they need to boom banking sectors and economy.

The commercial bank who is borrowing money from RBI also has to pledge government securities as collateral and the later bank has to re-purchase that pledge govt. security which will include interest in that and this whole deal is made through "repurchase agreement" between both the banks.

What is Reverse Repo Rate?

Reverse repo rate is totally opposite of repo rate, in which banks issued short term borrowing instrument to RBI and RBI borrows money from banks basically to control too much money floating in the banks. And banks prefer to lend their money to RBI because they will receive an Interest and rate at which interest is received is known as Reverse repo rate.

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