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Monday, January 28, 2013

CRR, Reverse Repo and Repo Rate

CRR: Cash Reserve Ratio is the amount of funds every bank in India has to keep with RBI.
RBI uses the CRR to squeeze out the excessive fund in the system.

Reverse Repo: It is the rate at which RBI borrows money from commercial banks. An increase in reverse repo rate can prompt banks to park more funds with RBI to earn higher return on idle cash. It is also a tool use by RBI to suck excessive funds in banking system.

Repo Rate: It is an instrument of monetary policy. The rate at which the RBI lends money to commercial banks is called repo rate. Whenever banks have any shortage of funds they can borrow from RBI

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