Скачать или смотреть What is the "REVERSE REPO Rate"?

UPSC MCQ. Which of the following best describes the Reverse Repo Rate (RRR)?
A.
The rate at which the government borrows from the public.
B.
The rate at which commercial banks lend to the public.
C.
The rate at which commercial banks park their surplus funds with the RBI.
D.
The rate at which the RBI lends money to commercial banks against government securities.

The Reverse Repo Rate (RRR)
The Reverse Repo Rate (RRR) is a crucial monetary policy tool used by the Reserve Bank of India (RBI) to manage liquidity and control inflation in the Indian economy.
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What is the Reverse Repo Rate?

Simply put, the Reverse Repo Rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks within the country.

Lending by Commercial Banks to RBI: When commercial banks have surplus funds (excess liquidity) that they don't need to lend out immediately, they can "park" these funds with the RBI.

Against Collateral (Government Securities): In exchange for these funds, the RBI provides government securities to the commercial banks as collateral. This is done through a "reverse repurchase agreement," where the RBI effectively sells securities to banks with an agreement to repurchase them at a future date at a pre-determined price.


Interest Earned by Banks: The interest rate paid by the RBI to the commercial banks for these parked funds is the Reverse Repo Rate.

Current Reverse Repo Rate in India:

As of June 9, 2025, the Reverse Repo Rate in India is 3.35%. (Note: The fixed reverse repo rate has largely been replaced by the Standing Deposit Facility (SDF) rate as the floor of the Liquidity Adjustment Facility (LAF) corridor since April 2022, but the concept and utility remain relevant.)

Utilities and Importance of the Reverse Repo Rate:

The Reverse Repo Rate is a vital instrument in the RBI's toolkit for:

Liquidity Management:

Absorbing Excess Liquidity: When there's too much money in the banking system (excess liquidity), which could lead to inflation, the RBI increases the Reverse Repo Rate. This encourages banks to deposit more of their surplus funds with the RBI, as they earn a higher return. By doing so, the RBI effectively sucks out excess cash from the market, reducing the money available for lending.



Injecting Liquidity (Indirectly): A decrease in the Reverse Repo Rate makes it less attractive for banks to park funds with the RBI. This incentivizes banks to lend more to businesses and consumers, thereby increasing liquidity in the market and stimulating economic activity.


Inflation Control:

Curbing Inflation: By absorbing excess liquidity through a higher Reverse Repo Rate, the RBI reduces the money supply in the economy. Less money chasing the same amount of goods and services helps to cool down demand and control inflationary pressures.

Combating Deflation: Conversely, a lower Reverse Repo Rate encourages more lending, which can boost demand and help combat deflationary tendencies.

Influence on Interest Rates:

The Reverse Repo Rate acts as a floor for short-term interbank interest rates. When the RBI changes this rate, it signals its stance on monetary policy, influencing other interest rates in the economy, including those on deposits and loans offered by commercial banks to their customers. A higher RRR can lead to higher deposit rates as banks compete to attract funds, and subsequently, potentially higher lending rates.

Financial Stability:

By providing a safe avenue for banks to park their surplus funds, the Reverse Repo Rate helps in maintaining financial stability. It reduces the incentive for banks to engage in risky lending practices just to deploy their excess cash.

Analogy for Understanding:

Think of the RBI as a "super bank."

Repo Rate: Commercial banks needing money go to the super bank (RBI) to borrow.

Reverse Repo Rate: The super bank (RBI) needing to manage extra money in the system, takes deposits from commercial banks.

Hashtags for YouTube:

Here are some relevant hashtags you can use for YouTube videos explaining the Reverse Repo Rate and its utilities:

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