Reserve Bank of India controls the level of liquidity by adjusting the Reverse Repo Rates and Repo Rates. In different times, Reserve Bank raised the Reverse Repo Rates under the LAF (Liquidity Adjustment Facility) program.
Reserve Bank of India adjusts the Reverse Repo Rate, from time to time, in order to control the liquidity. Reverse Repo Rate is actually the rate, at which Reserve Bank of India borrows from the commercial banks. So, it can be said that, through Reverse Repo Rate, the commercial banks park their excess liquidity with Reserve Bank of India.
On the other hand, Repo Rate is the rate, at which the commercial banks borrow funds from the Reserve Bank of India. So, Repo Rate is actually an instrument through which, Reserve Bank of India, pumps liquidity into the economy.
In January, 2006, Reserve Bank of India decided to raise the Reverse Repo Rate by 25 basis points, through its’ LAF (Liquidity Adjustment Facility) program, in order to fix the problem of liquidity shortage. By this decision of Reserve Bank, the Reverse Repo Rate went up to 5.50 percent from the level of 5.25 percent.
It can be mentioned here, that under this LAF program, Reserve Bank of India decided to fix the Repo Rate at the level of 6.50 percent.
In October 2005, Reserve Bank of India increased the Reverse Repo Rate by quarter percentage point. This increase pulled up the Reverse Repo Rate to the level of 5.25 percent from a rate of 5 percent.
Before 2005 also, Reserve Bank of India raised the levels of Reverse Repo Rate. In fact, in the period between October 2004 and October 2005, Reserve Bank of India increased the Reverse Repo Rate in three stages. This three-stage increase led to a 75 basis point increase in the Reverse Repo Rate.
Last Updated on : 30th July 2013