Repo rate and reverse repo rates are very useful monetary tools that allow the government and the reserve bank of India to keep inflation under control. Loaning out money to the banks is done to maintain the liquidity of the corporations. Now, on the other hand, consider a situation where a bank has made excess amounts of money. The bank will now look to store their money in a safe haven that would pay them interest. When banks store their excess money with the reserve bank of India, the RBI pays those banks a certain interest. That particular interest rate is known as the reverse repo rate.

What is a marginal standing facility? 

Marginal standing facility or MSF is a special period of time where commercial banks are allowed to borrow from the RBI. In extreme conditions such as emergencies, the MSF rate is generally much higher than the normal repo rates in the country. The borrowing of the banks is done against the government of India’s approved securities. The marginal standing facility can sometimes lead to the reduction of the money supply in the economy as the banks themselves have to borrow at higher rates.  

Repo rate and its effect on the economy 

In addition to the reverse repo rate, the repo rate is one of the most important monetary tools that the Indian government and reserve banks have. The repo rate can assist a government in regulating a country’s money supply and inflation levels. The repo rate has a direct impact on the country’s commercial banks, as the higher the rate, the greater the fee that the banks must pay the Reserve Bank of India. 

A repo rate is a monetary tool that controls the cost of borrowing for all commercial banks in the country.

Inflation 

When inflation levels are high in the economy, one of the primary objectives of the government is to bring down the level of money flow which is happening in the economy. One of the most efficient ways to do this is through repo rate. When a government decides to increase the repo rate in a country, it becomes extremely difficult for the banks and other corporations to borrow money from the Reserve Bank of India. A direct result of this is seen in the form of reduced money supply levels in the economy. The impact of such an action bears a negative effect on the economy but is very effective in controlling inflation levels in the country.  

Liquidity 

Repo rate and reverse repo rate both are quite incredible tools for the regulation of liquidity levels in an economy. When the government wishes to pump and unload huge amounts of money into the stream of the economy, the repo rate and reverse repo rate play important roles. In such circumstances, the government decides to lower the repo rate for all banks in the country. This makes it simpler and easier for banks to borrow money from the reserve bank of India. The direct effects of these actions are felt by the economy as industries and corporations now can easily obtain loans from banks at a cheap rate. The general money supply in the economy is boosted greatly when the repo rate is lowered. All these actions combined lead to boosting the growth rate of the particular economy. 

Conclusion

Reverse repo rate meaning is often hard to grasp for many, but it could be essentially viewed as a monetary mechanism that the government uses to absorb liquidity in the economy. The spike in reverse repo rates is seen in an economy when inflation is high. When banks are notified of the high reverse repo rate, they are encouraged to deposit their money within the reserve bank of India in order to earn profits through the high-interest rate the government is going to be paying them. The result of these actions is seen by the economy as banks are now left with fewer funds, and hence fewer loans are handed out by the commercial banks to the people of the country.