We often here the terms ‘Repo’ and ‘Reverse Repo’ in the banking jargon. Reserve bank of India (RBI) depends upon these tools for monetary control in India. The interest rates charged by the banks from us as customers, depend on these Repo and the reverse repo rates decided upon by the RBI. Then what are these repo and reverse repo and how do they affect the interest rates we pay to the banks? And what is the purpose of these two instruments in the banking sector? First of all, let us see, what ‘repo.’ is Repo in its full form simply stands for ‘Repurchase agreement.’ This is the process by which banks borrow money from the RBI. For the sake of this borrowing bank give some securities to the RBI, with an agreement, to repurchase the same at a predetermined rate and date. This rate or the interest rate RBI charges on this repo ‘lending’ is the ‘Repo Rate.’ If this Repo rate is reduced by the RBI, the borrowing rate of the banks from the RBI decreases and vice versa. Thus, when the repo rate is lower it becomes cheaper for the banks to borrow from the RBI. This leads to the next step of the banks also reducing the interest rates they charge form the customers. Then the customers tend to borrow more unhesitatingly from the banks, which leads to the increase in the money supply in the market. Hence, RBI tries to increase or decrease the money supply in the market, by increasing or decreasing the Repo rate.  Then what is ‘Reverse Repo?’ It is the case, where in the RBI is taking the loan from the banks. For this borrowing of it from the banks RBI pays an interest rate or simply rate to the banks. Thus this is also a tool, by which RBI either contracts or expands money supply in the markets. If RBI increases the Reverse Repo rate i.e. the rate it pays to the banks for borrowing money from them; more and more banks would prefer parking the money they have with the RBI. As this would fetch them enough return in the form of interest and at the same time safer too. This prompts the banks to charge higher interest rates from their customers, as the money the banks possess got better demand from the RBI. This increase in the interest rates charged by the banks would discourage the general customers, from taking loans from the banks liberally. Thus the money supply in the market would be reduced. This helps the RBI in effectively contracting the money circulating in the market and thus reducing the demand for the Goods and services. This reduced demand for their goods would result in the merchants reducing the prices of the same, in order to compete better and protect their customer base.  Let us take the example of the Repo Rate. Take the case scenario, wherein the RBI has decided to increase the Repo rate; from 6.75% to 7.25% i.e. an increase of 0.5%. How does it affect the common man? The answer is simple...As the repo rate is the rate at which banks take loans from the RBI and now this rate was increased by the RBI; the banks too in their turn need to pass on this additional rate burden, on to the customers. Hence they too increase the interest rates they charge on the loans to the customers; either in proportion to the Repo rate increase or else by some other magnitude. Thus if you have a loan on either your automobile or the home; with a bank at an interest rate of 10% annum a till now; after this hike in the repo rate your bank may charge an interest of 10.50% per annum, on that loan. This would affect, your EMI, which would tend to increase.  Hence, the Repo rate and the Reverse repo rate tend to affect the common man, who is having a loan with a bank, on floating rate of interest. We would see , what is meant by floating interest rate and the fixed interest rate and how do they effect the EMI you pay on your loans, some time later.