Banking Rates: Reverse Repo Rate

Consider a situation in which John's bank had excess funds.

The bank deposits the funds in the RBI and earns interest on that amount. This rate of interest is known as Reverse Repo Rate.

It is used by the country's central bank as an instrument to check inflation.

By increasing the Reverse Repo Rate, RBI motivates commercial banks to deposit their funds leading to control inflation.

This reduces the money supply in the economy and thus helps in arresting Inflation.

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