RBI Increased the Repo Rate and Reverse Repo Rate

Finally, RBI has increased the repo rate and reverse repo rate by announcing in the First Quarter Review of Monetary Policy 2010-11, it has been decided to increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.50 per cent to 5.75 per cent and the reverse repo rate by 50 basis points from 4.00 per cent to 4.50 percent with effect from Second LAF of July 27, 2010.

It is noted that the bank Governor D. Subbarao has hiked  only the repurchase rate by a quarter percent raising it to 5.75 percent and the reverse repurchase rate by half a percent, taking it to 4.50 percent. Other policy rates have been kept untouched by the Bank.

The increase in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds. Reverse repo rate, referred to as the short term borrowing rate, is the rate at which the central bank borrows money from commercial banks. This rate makes it more lucrative for banks to park funds with the central bank.