- A repo rate is the short form of repurchase rate
- A repo rate is also called as the cost of credit.
- A repo rate is managed by the central authority of the government (RBI in India).
- The main function of repo rate is to increase the flow of money in the economy and to maintain liquidity.
- When in a market, there is a lack of liquidity the interest rate4 is raised and vice a versa.
- A repo rate is a rate at which the central bank grants a loan to the commercial banks4 against government securities.
- Central bank used this function to control the inflation in the economy and to reduce the borrowings of the commercial banks.
- In simple language, a rate at which RBI lends money to commercial banks, by an agreement that banks will repurchase the same pledged securities at a future date with predetermined price, against pledge of government securities when banks needed a fund to meet their day to day transactions.
Reverse repo rate:
- A reverse repo rate is a rate by which the government securities are sold by the central authority in an auction.
- It is a monetary instrument used to maintain supply in the market.
- A reverse repo is the opposite of the repo rate.
- A reverse repo rate is a rate at which the commercial banks give a loan to the central authority.
- A reverse repo rate is always lower than the repo rate.
- If a reverse repo rate increases will decrease the money supply4 and if it decreases, the money supply increases.
- If a reverse repo rate increases it will beneficial to the commercial banks means a commercial bank can invest more money in the commercial bank.