What is meant by CRR RATE , REPO RATE AND REVERSE REPO RATE ..? Why RBI has increased when Inflation is High ?

Question

what is meant by CRR RATE , REPO RATE AND REVERSE REPO RATE

Answer 1

The Cash Reserve Ratio (CRR) is the amount of money commercial banks HAVE to keep within its 'vaults' at the central bank (the RBI in your case). The CRR rate is simply how much percent of total deposits a bank has to keep in reserves and not lend out. Some central banks use this ratio to fight inflation, because when they increase it, it means less available money for banks to lend, therefore less money supply, therefore less inflation (not so effective way in fact).

The Repo (repurchase) rate is the discount rate at which the central bank (RBI) purchase securities from commercial banks. (to put it simply, it is the rate at which the central bank borrows from the banks) Here again, the central bank can fight inflation by increasing the repo rate because as the repo rate increase, commercial banks are more motivated to buy government securities and lend to the central bank (more profitable) which means less money available to lend in the economy.

The reverse repo rate (bank rate) as it's name indicate, is the rate at which banks borrow from the central bank. If the central bank wants to fight inflation, they would increase this rate too, so tha banks are discouraged from borrowing from the central bank (more expensive) which means less funds available to lend, therefore lower inflation.

Hope that help