REVERSE REPO RATE (RRR) IN BANKING SYSTEM.


Reverse Repo Rate                   (monetary policy terms-4)
it is that rate of interest at which the RBI borrows from the commercial banks. If the Reverse Repo Rate is increased, it becomes attractive for the banks to lend to the RBI. Hence the money which would have gone to the public in the form of loan starts going towards the RBI. If the Reverse Repo Rate is reduced, then instead of giving loan to the RBI the banks prefer lending to the general consumers. Earlier Reverse Repo Rate used to be 0.25% lower than the Repo Rate. However this relationship does not exist anymore.
Under its Liquidity Adjustment Facility, the RBI borrows on a daily basis from those banks which have surplus at the Reverse Repo Rate. The same money is given to the other banks in the form of loan at the Repo Rate. As the Reverse Repo Rate is always less than Repo Rate, this process automatically leads to profit for the RBI. From this profit the RBI pays dividend to the
government and also maintains it’s contingency.

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