Reverse repo is that rate which RBI pays to banks.
When banks have surplus liquidity and there are not enough borrowings from banks by consumers (as is the condition now), banks park their surplus money with RBI and earn some minimum interest. The rate at which RBI pays interest is known as reverse repo rate.
It is only logical that repo rate will always be more than reverse repo rate.
When RBI wants the economy to grow, it will reduce reverse repo rate (as was seen recently in April). By doing so, it will give a signal to banks that instead of deploying surplus money with RBI for a low return they should deploy the same in projects in the economy, which will help to kickstart the economy.
In times of ample liquidity, repo rate is practically redundant. Hence you will observe RBI focusing more on cutting reverse repo rates in times of slowdown, as was seen in the recent past.
No comments:
Post a Comment