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What is the impact of increase/ decrease of reverse repo rate on Monetary Base, Money multiplier and therefore, overall money supply?

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Reverse Repo Rate (RRR) is the rate at which the central bank "borrows" money from commercial banks. (In practical terms it refers to the surplus funds that these commercial banks park with the central bank.)

This leads to a FALL in the total money supply as it soaks liquidity from the market.

This reduction in total cash flow in economy (which is now lying stagnant at the central bank) implies a weakened monetary base and reduced capability of banks to "create" more money as they are left with little real cash to extend loans upon given the cash reserve ratio requirements.

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  • $\begingroup$ The question asks what the effect of changing the rate is, not what a reverse repo accomplishes. The reverse repo rate is a policy rate used by some central banks (Reserve Bank of India being one). $\endgroup$ – Brian Romanchuk Apr 23 '17 at 13:04
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In the US right now we have significant excess reserves due to Quantitative Easing. Raising the reverse repo rate (which currently is at 0.75pct) would have no effect on the total excess reserves in the system. However it might discourage the creation of loans by the private banking system (due to higher rates), which will act to restrain the economy.

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