Question

Discuss briefly, how this instrument helps in controlling credit, creation by commercial banks.

Answer 1

Central Bank uses it to control credit created by commercial banks in following manner: The Central Bank employs the Reverse Repo Rate as a credit-control tool. It aids in the regulation of the economy's money supply. When the Central Bank increases the Reverse Repo Rate, commercial banks are more likely to lend their excess cash to the Central Bank rather than to customers. This reduces the amount of money in circulation in the economy, which aids in inflation management.