Repo vs. Reverse Repo: The Money Game

The Connection: When the RBI increases the Repo Rate, banks have to pay more interest to RBI. Banks pass this cost to YOU.
Result? Your Home Loan interest goes up, and your EMI increases.

1. The Flow of Money

Think of money like water flowing through a pipe from the RBI to You.

RBI (The Source)

REPO RATE

COMMERCIAL BANKS

INTEREST RATE

PUBLIC (You)

2. Decoding the Rates

A. Repo Rate (Repurchase Option)

• Definition: The rate at which RBI LENDS money to commercial banks for the short term.
• Why Change It? To control Inflation.
• Logic: High Inflation → RBI Increases Repo → Loans get expensive → People spend less → Demand falls → Prices stabilize.

B. Reverse Repo Rate

• Definition: The rate at which RBI BORROWS money from banks (or banks park excess cash with RBI).
• Why Change It? To suck liquidity out of the market.
• Logic: High Reverse Repo → Banks prefer parking money with RBI (Safe) instead of lending to public (Risk) → Money supply decreases.

3. The Reserve Ratios (The Parking Lot)

Before lending, banks must set aside some money. This is mandatory.

Feature	CRR (Cash Reserve Ratio)	SLR (Statutory Liquidity Ratio)
Kept With?	Kept with RBI.	Kept with Bank itself (in vault).
Form	Only CASH.	Cash, Gold, or Govt Securities.
Interest?	No Interest earned.	Banks earn interest on securities.
Purpose	Safety cushion for depositors.	To ensure bank has liquid assets.

4. The Monetary Policy Committee (MPC)

Who decides these rates? It's not just the Governor anymore.

• Members: 6 Members (3 from RBI + 3 from Govt).
• Head: RBI Governor (Has the casting vote in case of a tie).
• Meeting: At least 4 times a year.
• Target: To keep Inflation (CPI) at 4% (+/- 2%).

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Revision Flashcards

Repo Rate

Who lends to whom?

RBI lends to Banks

It is the rate for short-term borrowing against securities.

Inflation Target

What is the MPC's goal?

4% (+/- 2%)

The RBI tries to keep inflation between 2% and 6%.

CRR

Does bank earn interest on it?

NO

Cash Reserve Ratio kept with RBI earns zero interest.

Bank Rate

Different from Repo?

Yes

Bank Rate is for long-term lending and has no collateral. Repo is short-term with collateral.

Exam-Style MCQs

Q1. If RBI wants to control high inflation, what will it likely do?

A) Decrease Repo Rate

B) Increase Repo Rate

Correct! Increasing the rate makes loans expensive, reducing money supply and demand.

C) Remove CRR

Q2. The Statutory Liquidity Ratio (SLR) can be maintained in the form of:

A) Cash only

B) Gold only

C) Cash, Gold, or Securities

Correct! Unlike CRR (Cash only), SLR gives banks flexibility.

Q3. Who is the chairperson of the Monetary Policy Committee?

A) Finance Minister

B) RBI Governor

Correct! The Governor heads the 6-member committee.

C) Prime Minister

Part of the Economics Revision Series.