How will reverse repo rate and …

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How will reverse repo rate and operation market control excess money supply in economy

Posted by Shaheen Aslam 6 years, 10 months ago

CBSE > Class 12 > Economics

3 answers

Abhishek Thakur 6 years, 10 months ago

Reverse repo rate is a rate at which commercial bank keep their surplus fund with central bank. In case of excess money supply central bank will increase reverse repo rate so that it is beneficial for commercial bank to keep their funds with central bank. It decreases money supply in the economy because of less credit creation capacity by commercial bank. Open Market Operation is sale and purchase of government securities by central bank to/from commercial bank. In case of excess supply of money central bank sell securities to commercial bank. So, that commercial bank has to pay for it. It decreses credit creation capacity of bank and Ultimately money supply.

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Nikita Lohiya 6 years, 10 months ago

And in open market operation the sale of securities by central bank reduces the reserve of banks.It adversely affect the bank's ability to create credit and therefore decrease the money supply

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Nikita Lohiya 6 years, 10 months ago

An inc.reverse repo rate induces the bank to transfer more funds to RBI due to attractive interest rate . That's why theee is a inverse relation between revrse repo rate and money supply in the economy

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