What Reserve Banks do to economy?

What is the jargon like Repo rate and reverse repo rate?

Reserve Bank as called in India or Federal Reserve as called in USA, is regulator of money market. Following imaginary conversation very practically explains the role of RBI or Fed Reserve in economy and many functions it performs to do its job properly:

Adam: I have heard recently that Mr. Rajan (RBI Governor) has reduced Repo Rate by 50 basis points and everyone is saying that this is good for the market. Loan EMI may also come down. What is this rate cut means actually? I want to understand this.

Eve: To understand this you first need to know, how does a bank function. 

Adam: Why? 

Eve: Because all these are inter-related. Tell me – what does a bank do? 

Adam: Bank takes money from depositors and gives loan to earn interest. That way they keep everyone happy and make a profit also. 

Eve: Correct, but there are more to it. Let me explain this in a very simplistic way. Bank needs money. Bank can get money from depositors like you and me and also from RBI. But bank also needs to pay certain interest to us and to RBI.  Continue reading