<P> If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate . currently, Repo rate is set to 6% w.e.f 9 August 2017 . Banks have to pledge government securities as collateral . This kind of deal happens through a re-purchase agreement . If a bank wants to borrow Rs. 100 crores, it has to provide government securities at least worth Rs. 100 crore (could be more because of margin requirement which is 5% - 10% of loan amount) and agree to repurchase them at Rs. 106.75 crore at the end of borrowing period . So the bank has paid Rs. 6.75 crore as interest . This is the reason it is called repo rate . The government securities which are provided by banks as collateral cannot come from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalty). Banks have to provide these securities additionally . </P> <P> To curb inflation, RBI increases Repo rate which will make borrowing costly for banks . Banks will pass this increased cost to their customers which make borrowing costly in whole economy . Fewer people will apply for loan and aggregate demand will get reduced . This will result in inflation coming down . RBI does the opposite to fight deflation . Although when RBI reduce Repo rate, banks are not legally required to reduce their base rate . </P> <P> As the name suggest, reverse repo rate is just the opposite of repo rate . Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks . The reserve bank uses this tool when it feels there is too much money floating in the banking system . An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI . As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies etc .) which is always risky . </P> <P> Repo Rate signifies the rate at which liquidity is injected into the banking system by RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks . Currently, Reverse Repo Rate is pegged to be 0.25% below Repo Rate . </P>

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