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reverse repo rate, what is reverse repo rate, reverse repo rate meaningCurrent Reverse Repo Rate: Under the Reverse Repo Rate, banks deposit excess funds with the RBI and earn interest for it.
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  • Under the Reverse Repo Rate, banks deposit excess funds with the RBI and earn interest for it.
  • The opposite of Reverse Repo Rate is the Repo Rate, at which the banks borrow short-term money from the RBI.

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cricket-match-book-exchange,An increase in the Reverse Repo Rate provides an incentive to the banks to park their surplus funds with the central bank on a short-term basis, thereby reducing liquidity in the banking system. In short, the RBI absorbs surplus money from banks against the collateral of eligible government securities on an overnight basis. This happens under the Liquidity Adjustment Facility or LAF under the Reverse Repo Rate.

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Banks can park their money with the RBI at a lower interest rate than the Repo Rate or Repurchase Rate. The Reverse Repo Rate is lower than the Repo Rate. The spread between the two is the RBI’s income. RBI earns more on what it lends to banks than its expense on what it borrows from the banks. Since RBI can’t offer higher interest on deposits and charge lower interest on loans, Repo Rate is higher than Reverse Repo. Also, the Reverse Repo Rate is generally kept lower to discourage banks from keeping surplus funds with RBI as against lending them to individuals and businesses. Both the primary tools in RBI’s Monetary and Credit Policy work in an opposite manner.

WATCH VIDEO | FE Explained: What is RBI Repo Rate?

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In India, the current Reverse Repo Rate is decided by the RBI’s Monetary Policy Committee* (MPC), headed by the RBI Governor. The decision is taken in the bi-monthly meeting of the Monetary Policy Committee*.

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When RBI increases the Reverse Repo Rate, banks may increase home loan lending rates since it is more profitable to invest in low-risk government-backed securities as against lending money to people in the form of home loans. The home loan rates may fall when the Reverse Repo Rate goes down.

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RBI increases the Reverse Repo Rate so as to incentivise the banks to deposit surplus funds with it to earn higher interest on them. It reduces the supply of money in the system, thus controlling inflation. Similarly, when the RBI has to stoke inflation a little, it may choose to cut Reverse Repo Rate and Repo Rate, which frees up the money supply.

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Higher Reverse Repo Rate reduces the money supply in the market as the banks park their surplus cash with the RBI to earn attractive returns as against lending to individuals and businesses. It reduces the supply of money in the system, thereby boosting the strength of the rupee.

*As per the trends prevalent at the time of publishing

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