Question

how can reverse repo rate regulate aggregate demand ?

Answer 1

Hi Abhishek,

Repo and Reverse-repo transactions are a part of open market operations where repo means purchase of securities by RBI (i.e. RBI lends to the banks) with an agreement to sell back at a specified rate and reverse-repo means sale of securities by RBI (i.e. RBI borrows from the banks) with an agreement to buy back at a specified rate. So, in case of excess demand, the central bank sells the securities, in order to restrict the supply of the money in the market. This reduces the spending capacity of the people, resulting in a lower level of aggregate demand, thereby, reduces the excess demand.