• Reverse Repo Rate

    Reverse Repo rate is the rate at which banks deposit their excess money with the central bank for short term only. Central bank uses this tool to reduce liquidity in the market when there is high liquidity in the banking system. If the reverse repo rate is high then the banks will prefer to deposit the excess money with the central bank, thus reduce the liquidity in the system.

    The money deposited with the central bank is risk free, that’s why for high reverse repo rate banks always prefer to deposit the excess money with the central bank rather than lending it to the customers which involves significant risks. High reverse repo rate helps to reduce the lending by the banks and reduces the loan supply in the market. Lower loan supply decreases the lending for auto, home etc. which helps to tame inflation.

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