WAT-PI Preparation Kit

Finance &
Economics

Management through knowledge and value



 Reverse Repo Rate is the rate of interest at which RBI borrows

from the commercial banks by selling securities and signing a
repurchase agreement.
A high reverse repo rate means that banks have high incentive to
deposit money with RBI and hence the liquidity in the economy
decreases. This tool is used when RBI feels there is too much
liquidity in the economy.
A low reverse repo rate means that banks have less incentive to
deposit money with RBI and hence the liquidity in the economy
increases. This tool is used when RBI wants to promote growth in
the economy.

REPO (Injection of liquidity)

Liquidity flow

RBI Bank
Govt. Securities flow

Reverse REPO (Absorption of liquidity)

Govt. Securities flow

RBI Bank

Liquidity flow
 Monetary Policy Fiscal Policy
Tools: Interest Rates CRR, Repo Tools: Taxes, Government
Rate, Reverse Repo Rate, SLR, MSF Expenditure
and Open Market Operations

Generally carried out by Central Carried out by the Government

Banks/Monetary Authorities

Quicker to implement Time required in decision making

regarding where to spend

Expansion: Low interest rates Expansion: Higher Government

spending, Lower taxes

Contractionary Policy: High interest Contractionary Policy: Low

rates Government spending, Higher taxes
Price (P)

Quantity (Q)

Fig: The demand curve

Price (P)

Quantity (Q)

Fig: The supply curve

 The supply curve

Price (P) Market

Equilibrium

The demand curve

Quantity (Q)

Fig: Market Equilibrium

Parameter Perfect Monopolistic Oligopoly Pure Monopoly
Competition Competition
No. of Firms Many Medium Few One
Competitive Price Differentiated Mixed Strategy Control over a
Strategy Products resource,
Copyrights,
Patents
Elasticity of Perfectly Elastic Elastic More or Less
Demand Elastic