EASY DEFINITION FOR REPO AND REVERSE REPO RATES

What is CRR?

All the banks registered with Reserve Bank of India has to keep a certain amount with RBI. This amount of funds is known as CRR or Cash Reserve Ratio. If RBI increases this amount, the funds available with the banks will come down. Thus RBI usually uses this CRR system to drain out excessive money in the country’s system. The Commercial banks are supposed to maintain with the RBI an average cash balance, the amount of which shall not be less than 3% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis and the RBI is empowered to increase the rate of CRR to such higher rate not exceeding 20% of the NDTL.

REVERSE REPO RATE:

RBI also borrows money from the banks. Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest.

An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system. 

REPO RATE:

The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. 

A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. When this happens the interest rates for loans from the bank for public will be decreased as happened a few days back! Here RBI wants to pump more money into the system.