Reciprocal links boost your PageRank and allow search engines to group you.
Reciprocal links are also called two-way links.
When websites begin to link naturally, there will be some cross linking in a given community.
When this happens, the links are called reciprocal links.
These links help Google and other search engines to group you according to your business's similarity to others.
This also allows your keyword advertising to be more specific.
These should be used in moderation and only those links that link to pages with a high PageRank should be used.
For example, if you run a boutique selling designer wedding dresses, you will naturally link to your friends in the same industry in your area.
This will amount to a small number of links (say 5 or 10).
However, if your site has between 20-30 links, this will be viewed as manipulated and there will be penalties placed on you by search engines.
All reciprocal links must be relevant to your website.
If a link is not relevant, search engines see this as spam or as a link farming technique.
Be careful of link exchanges, where websites can buy a good PageRank by trading links or other link acquisition schemes, this is once again a form of link farming and it is bad.
Search engines have penalised websites that have high reciprocal link percentages because of this.