RBI Raised Repo & Reverse Repo Rates

The RBI raised its main lending rate or repo rate from 5.25% to 5.5% and the reverse repo rate, at which it absorbs excess cash from the banking system from 3.75% to 4% on 2 July 2010. Earlier the apex bank had earlier changed the rates by .25% moving the repo & reverse repo rates to 5.25%. It was felt that that the repo and reverse repo rates would not be further changed before the review of the monetary policy on 27 July 2010. The belief was supported by news on the fall in food inflation by four percentage points, as on 19 June 2010.
 It was observed that banks were left with adequate resources to provide credit for the broad spectrum wireless licences even after massive lending to telecom companies during the 3G auction. This raised the question as to whether banks were taking advantage of opportunities available at the repo window. It appeared that excess money lay with banks and there could arise the possibility of an inflation.
Roles of Repo rate, Reverse Repo rate, CSR
As repo rate stands for the rate at which banks borrow from RBI, an increase in repo rate would enable RBI to lower money flow in the banking system. Reverse repo on the other hand is the rate at which RBI borrows from the bank. A reduction in reverse repo rates would lure banks to keep their money with the RBI. This again will help check money circulation on a large scale. Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI by altering these rates check money flow when there is greater volume of money in the economy.