Full formBanking & Finance
REVERSEstands forReverse Repurchase Agreement
Full Form of REVERSE
What is REVERSE?
A Reverse Repurchase Agreement, commonly called a reverse repo, is a monetary policy instrument used by the Reserve Bank of India (RBI) to absorb excess liquidity from the banking system. In this operation, the RBI borrows money from commercial banks by selling government securities with an agreement to repurchase them at a predetermined future date and price. The interest rate paid by the RBI to banks is known as the reverse repo rate. This rate serves as a floor for short-term interest rates in the money market and is a key tool for controlling inflation and stabilizing the rupee. The reverse repo rate is revised periodically during the RBI's monetary policy reviews. It is inversely related to the repo rate—when the reverse repo rate is increased, banks earn more on their parked funds, discouraging lending and thus reducing money supply. Indian students preparing for banking and civil services exams frequently encounter questions on the reverse repo rate, its impact on liquidity, and its difference from the repo rate. Understanding this concept is essential for grasping the RBI's liquidity adjustment facility and its role in managing the economy.
REVERSE का फुल फॉर्म
रिवर्स रिपर्चेज एग्रीमेंट
Example
The RBI raised the reverse repo rate by 25 basis points to curb inflationary pressures in the economy.
REVERSE — frequently asked questions
What is the full form of REVERSE?
The full form of REVERSE in the context of banking is Reverse Repurchase Agreement, commonly referred to as the reverse repo rate.
How is the reverse repo rate different from the repo rate in India?
The repo rate is the rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which the RBI borrows money from banks. The reverse repo rate is always lower than the repo rate.
Why does the RBI change the reverse repo rate?
The RBI adjusts the reverse repo rate to control money supply and inflation. Increasing the rate encourages banks to park more funds with the RBI, reducing liquidity; decreasing it does the opposite.