Q.Explain the meaning of Repo Rate and Reverse Repo Rate, and state the effect of a rise in each on the money supply.
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Start your 14-day free trial to unlock the full solution →Repo Rate is the interest rate at which the RBI lends short-term funds to commercial banks against the collateral of government securities, with an agreement to repurchase them later. A RISE in the repo rate makes it costlier for banks to borrow from the RBI, so banks in turn raise their own lending rates, discouraging borrowing by the public and contracting the money supply.
Reverse Repo Rate is the interest rate at which the RBI borrows funds FROM commercial banks (i.e. banks lend to the RBI), again against government securities. A RISE in the reverse repo rate makes it more attractive for banks to park their surplus funds with the RBI rather than lend them out to the public, which similarly contracts the money supply. …
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