REVERSE REPO

REVERSE REPO :
- is the rate which is paid by RBI to banks on Deposit of funds with RBI.
- A reduction in the repo rate will help banks to get maoney at a cheaper rate. When the repo rate increases borrowing borrowing from RBI becomes more expensive.
- To borrow from RBI bank have to submit liquid bonds / Govt Bonds as collateral security, so this is a short term gap filling facility and bank does not use this facility to Lend more to their customers.
- This is opposite of the repo transaction. In the first leg RBI sells securities and absorbs liquidity.
- In the second leg RBI buys back the securities and releases value equivalent to the amount given in the first leg plus interest at reverse repo rate on the amount given in the first leg.
- This instrument is used for absorbing liquidity form the system for short periods.