Repo Rate , reverse repo rate and Liquidity.

The  “Repo Rate” and “Reverse Repo Rate” are generally used in the banking sector. Repo rate is the interest charged by the RBI to commercial banks ,while reverse repo rate is the interest rate offered by the RBI to commercial banks.

Now question is why it required? Let us understand with an example .Suppose a xyz bank is there ,which performing very well in banking sector ,so it most earning huge amount of money .Suppose it has excess money ,in that case it can deposite their excess money into RBI. Here R.B.I(Central Bank) is more safer as compare to keeping money of account holder in xyz bank account . Also bank can earn money, So intrest rate given by Reserve bank(RBI) is known as Reverse repo rate .On the other hand, suppose in some case bank xyx is not performing well ,it means it is not earning money , so how it pay salary to it's employee ,and how it will return money+intrest to account holder .In such situation bank can closed , But here Reserve bank play an important role ,it lend money to bank xyz(commorcial bank) ,with an intrest rate ,which is called as repo rate.

Alwase repo rate is greater than reverse repo rate .

Few important Points

1.>Repo rate is used to control inflation

3.>Reverse repo rate is used to control money supply in the market.

2.>Repo rate is to deal with deficiency of funds. Whereas, 

3.>Reverse repo rate deals with liquidity in the economy.

Liquidity:

Liquidity is the degree at which an asset or security can be quickly bought or sold in the market without affecting it's price. example you have a schooter having price rupees 10000 ,but you want a bike having price rupees 10000, so you are planing to sell schooter , so 1st you need to find one person who can buy schooter and once you have rupees 10000 ,thanyou can buy a bike.so this may take 2 day's or 10 day's or month ,But suppose you have rupees 10000 cash ,you can buy a bike within a day. So money has highest liquidity.