While organizing feeds in Google Reader, I came to know that renaming folders in it is not an easy task. Google Reader doesn’t provide any direct option to rename folders or labels as they are called.
But you can rename folders by applying a trick. Here is the step by step process to rename any folder inside Google Reader.
1. Click on Google reader Settings option given at the top of the page. Inside setting click on Subscriptions tab.

2. On the right side of a window in the given search box, enter the name of folder you want to rename.

3. By entering the name of folder all the subscriptions under that folder will be displayed on the left side. Click on All subscriptions option to select all the subscriptions.

4. Now go to “Change folders” tab and click on it. On a drop down menu select “New folder” option.

5. Now enter the name of new folder in a given box and click OK.

6. Now click on “More actions” and select the newly made folder from the drop down menu. Here in the example, I am selecting “Blogging Tips” folder. All the subscriptions will be assigned the label “Blogging Tips”.

7. You will notice that all the selected subscriptions are now tagged with “Blogging Tips”.

8. Now the next step is to delete the folder name “Blogging” from the feed. To delete the folder click on “Folders and Tags” tab.

9. Here you will see the list of all the folders in your feed. For deleting that folder click on the delete button next to it. You are deleting this folder because now this folder contains no feeds.

Now go to the Home section of your reader and you will notice a new folder named “Blogging tips” instead of “Blogging”.

You can perform the above steps to rename any folder inside your Google Reader. In this process actually we are not renaming the folder, instead, we are creating a new folder and moving all the subscriptions under that folder. And then finally deleting the old folder.
Update: On June 2, 2010, Google Reader team finally introduced this much demanded feature in Google Reader. You can now easily rename folders and tags in Google Reader in one click.

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