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How will 'Reverse Reps Rate'and 'OpenMarketOperations controlexcess moneysupplly in anenconomy ? |
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Answer» Solution :Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks WITHIN the country. It is a MONETARY policy instrument which can be used to control the money supply in the country.An increase in the reverse repo rate will decrease the money supply and vice-versa, other THINGS remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market. Open Market Operations(OMO) refers to the sale and purchase of GOVERNMENT securities in the open market by the Central Bank (RBI). By selling such securities the Central Bank soaks liquidity from the economy and by purchasing the government securities, Central Bank releases liquidity. This is an IMPORTANT method of regulating the money supply (liquidity) in the market. |
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