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MONETARY POLICY Reverse Repo Rate & OMO's PART 4 BY AYUSSH SANGHI
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Reverse Repo Rate It is the rate of interest at which the RBI borrows funds from other banks in the short term * This is done by RBI selling: government bonds, securities * to banks with the commitment to buy them back at a future date.
Reverse Repo Rate The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. * RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks.
How does Reverse Repo Rate Work? * Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates. When RBI increases the Reverse Repo, it means that now the RBI will provide extra interest on the money which it borrows from the banks. An increase in reverse repo rate means that banks earn higher returns by lending to RBI. This indicates a hike in the deposit rates.
Open Market Operations When there is excess of liquidity, RBI resorts to sale of G-secs to suck out rupee from system.
Open Market Operations * On the other hand, k when there is liquidity crunch in the economy, RBI buys securities from the market, k in order to release liquidity Hence OMO can be defined as to the purchase and sale of the Government securities (G-Secs) by RBI from/to market.
Objective Open Market Operations are carried out to adjust the liquidity condition of rupee in the economy When RBI sells government security in the markets, the banks purchase them. As soon as the banks purchase Government securities, they have reduced money to lend to the industrial houses or other commercial sectors.
Objective * This reduced surplus cash, contracts the rupee liquidity and consequently credit creation/credit supply. * Alternatively, when RBI urchases the securities, the Alternatively, when RBI purchases the securities, the commercial banks find them with more surplus caslh and this creates more credit in the system.
Conclusion Hence, in case of excess liquidity, RBI resorts to sale of G-secs to suck out rupee from system. ak buys securities from the market, thereby releasing liquidity.