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Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy.
Repo Rate and Reverse Repo Rate is that, with an increase in the Repo rate the borrowings of the commercial banks from RBI becomes dearer and as the result, fewer funds are borrowed.
Whereas, with an increase in the Reverse Repo Rate the RBI borrows money from commercial banks at a much higher rate, with the intention to regulate the supply of money in the economy.