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Reverse Repo rate and Open Market Operations: Understanding Monetary Policy 4) (for UPSC CSE)
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This lesson explains the very important concept of reverse repo rate and open market operations. It starts with the definition of Reverse Repo rate, its features, why does bank use reverse repo rate, how does repo rate work. Then it goes on to cover Open Market Operations - selling Government securities to take out money from the market. It also explains when and why does RBI do that.

Ayussh Sanghi is teaching live on Unacademy Plus

Ayussh Sanghi
Passionate Educator - CSE / Other Govt Exams [Peep into my Unacademy Plus Courses & experience awesome learning.]

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sir up k cm kon h sir akhilesh yadav
@ayusshSanghi sir OMO is related to selling of g-secs to commercial banks only nd not to public???? or they can also sell it to public?
Could anybody let me know that how RBI reduce liquidity in the banking system by increasing the rate at which it borrows loans from bank??? Thanks in advance
Shubhi Tanvi
2 years ago
see of the main job of RBI is to control the money supply in the market...when the money supply increases more than it should be, RBI tries to decrease that. If money supply decreases, RBI tries to increase it. SO when liquidity in the market increases more than it should be arises the concept of RVERSE REPO RATE. It is a very tactful move by the RBI. When liquidity increases in the market, the RBI borrows money from the commercial banks at a very higher rate. So it is but natural that the commercial banks will lend money to the RBI as It is getting a very higher rate of interest as compared to the people or industries. So if commercial bank will lend to the RBI, it will not have so much money at a time to lend it further to the people, industries , etc. Hence liquidity in the market will decrease.
Even if the RRP is slightly less than the interest that bank is charging to others...banks will lend the money to RBI since it's selling Govt securities and it's super safe to lend them....and it's also helps them to meet their SLR requirements (if they fall short of it)
g-sec is introduced by RBI or govt. of India?
how could deposit rates will in hike while increasing reverse repo ? bank gets incentive;right,reducing liquidity; also right. what my opinion @ deposit rate; while reverse repo increases banks will need more money to lend towards rbi, for that deposit rates ought to be decreased. consider if i m out of concept,sir.
Amit Rohan
2 years ago
My guess is that, banks would increase their interest rate on credits which inturn would decrease loans. This will lead to increase in money with banks to deposit with RBI. And also, i think RBI would increase RRR only when there is surplus money in the market and hence banks would definitely have surplus money at that time which is actually meant to credit out. Hope I helped.
Sir can individual buy G-Secs ??
Pritu D
2 years ago
Yes through giltz edged market of any commercial bank
Pritu D
2 years ago
Yes through giltz edged market of any commercial bank

  2. ABOUT ME >Passionate about Teaching >Taught at most reputed Civil Services Institutes >CA, Lawyer >Hit "Contribute to Ayussh" Follow me on: AyusshSanghi

  3. 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.

  4. 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.

  5. 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.

  6. Open Market Operations When there is excess of liquidity, RBI resorts to sale of G-secs to suck out rupee from system.

  7. 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.

  8. 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.

  9. 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.

  10. 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.