What are reverse repos?
Reverse repos describe the opposite side of a repo transaction. The RBI, which sells and later repurchases a security, is said to perform a repo. The bank — which purchases and later resells the security — is said to perform a reverse repo. Q:How is the repo linked to the bank rate? Bank rate is the rate at which banks borrow from the RBI. So if the RBI cuts or raises the repo rate, it may not be long before it has to do the same to bank rate as well. How does bank rate impact consumer loans? When bank rate is increased, in effect it increases the cost of the bank’s loans. Banks, for instance, will hike interest rate on fixed deposits. And similarly, they will charge more interest for all loans, including for homes. What is the call money market? The call money market is where banks and primary dealers borrow money for a day to 14 days. How does the repo rate relate to the call rate? The repo rate acts as a floor for the call rate. Suppose the call rate is lower than the repo rate, b
