Repo (Repurchase) rate is the rate at which the Central Bank
of a country lends shot-term money to the banks against securities. When the
repo rate increases borrowing from Central bank becomes more expensive. Therefore, we can say that in case, Central Bank wants to make it more expensive
for the banks to borrow money, it increases the repo rate; similarly, if it
wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo rate is the rate at which banks park their
short-term excess liquidity with the Central Bank. The banks use this tool when they feel that
they are stuck with excess funds and are not able to invest anywhere for
reasonable returns. An increase in
the reverse repo rate means that the Central
Bank is ready to borrow money from the
banks at a higher rate of interest. As a
result, banks would prefer to keep more and more surplus funds with Central
Bank.
