Q.What is meant by repo and reverse repo? How does RBI use them?

Repo and reverse repo are the RBI's day-to-day dial for adding or removing cash from the banking system.

In a repo (repurchase) transaction, the RBI lends short-term funds to commercial banks against government securities, with an agreement that the bank will repurchase those same securities at a later, pre-agreed date and price. This has the effect of injecting liquidity into the banking system.

In a reverse repo transaction, the RBI does the opposite — it borrows funds from banks by selling them government securities, with an agreement to buy those securities back later. This has the effect of absorbing (withdrawing) surplus liquidity from the banking system. …

Reversing the two definitions — remembering that in a REPO, the RBI is the one LENDING (injecting cash into banks), not borro …