Question

Explain how the ‘Reverse Repo Rate’ helps in correcting Excess Demand in an economy?

Answer 1

The Reverse Repo Rate is the interest rate at which commercial banks deposit their surplus funds with the Central Bank for a short period. When the Reverse Repo Rate is increased, market interest rates also rise. As a result, the cost of borrowing goes up, leading to a fall in the demand for credit. This helps reduce credit flows in the economy, as intended.