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Explain the role of reverse repo rate in controlling money supply. |
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Answer» Reverse Repo rate is the rate at which the RBI or the Central Bank borrows from the other commercial banks' It plays an effective role in controlling the money supply. For example,.an increase in the reverse repo rate implies that the banks will get a higher rate of interest from RBI on their lendings'.As a result of the.banks will lend more to the RBI and less to the public. Thus, resulting in a decrease in the money supply. Similarly, in case, the RBI decreases the reverse repo rate, The banks will get a lower rate of interest on their borrowings' As a result, they will lend more to the public which will, in turn, increase the money supply. |
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