Indian Economy:-Understanding Repo rate and Reverse Repo rate.

Repo rate, also called repurchase rate, is the rate of interest that banks pay when they borrow money from the Reserve Bank of India to meet their short-term fund requirements. This is called repurchase rate because when they borrow money from the RBI, they keep government securities with the central bank as collateral. When they pay the money back to RBI, they take the collateral back. 

Reverse repo rate is the rate of interest that banks get when they keep their surplus money with the RBI. Repo rate is always higher than the reverse repo rate. Reserve Bank of India slashed key lending rates by 25 basis points in its monetary policy review on Tuesday.

Now, the repo rate or the lending rate stands at 6.25 per cent while the reverse repo rate stands at 5.75 per cent. 

By controlling these rates, the RBI controls the rate of interest in the Indian economy.

“Cut in small saving rates should encourage banks to reduce lending rates,”

Read more at http://www.thestatesman.com/mobi/news/business/rbi-cuts-lending-rates-by-25-basis-points/168982.html#a2gc4UKRoLApdTuW.99