What is Repo Rate and Reverse Repo Rate?

You might have heard this term thrown around, but what does it really mean? The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks in India. This rate has a big impact on bank interest rates and the overall financial health of the country. It is the interest rate at which the Reserve Bank of India borrows money from all other commercial banks for a short span of time when they have excess cash reserves. This is a tool used by the central bank when it feels there is excess money floating with the commercial banks. An increase in reverse repo rate is beneficial for the banks as they will get a higher percentage of interest.

The reverse repo rate is one of the monetary tools of the central bank of India, which is the Reserve Bank of India. This is a policy put in place by the RBI to regulate the inflation and liquidity available in the economy. It’s an agreement where the bank provides eligible sources such as treasury bills to the RBI when they borrow from it.

FAQs on Understanding the Reverse Repo Rate

By adjusting this rate, central banks influence the willingness of banks to invest their surplus funds. Increasing the reverse repo rate incentivises banks to deposit their excess reserves with the RBI, thereby tightening liquidity. Conversely, lowering the rate encourages banks to lend more, promoting economic activity. These adjustments reflect the central bank’s monetary policy objectives, targeting inflation control and sustainable growth in the economy.

Higher CRR or SLR could translate to less loans floating in the market, impacting house and personal loan prices. Changes in repo rates can have a direct impact on large-ticket loans such as home loans. The reduction in repo rates is intended to spur growth and improve the country’s economic development.

Conversely, the reverse repo rate is the rate at which the central bank borrows money from commercial banks, also against securities. These rates are instrumental in regulating money supply and banking liquidity. Conversely, the reverse repo rate is the interest rate at which the central bank borrows funds from commercial banks to manage market liquidity. These rates are vital tools the central bank uses to ensure economic stability. The repo rate and reverse repo rate are key concepts in banking and finance. The repo rate refers to the interest rate at which the central bank, the Reserve Bank of India, lends money to commercial banks, thereby impacting economic activity.

Increasing Liquidity in the Market

• It is a crucial monetary policy tool used to control inflation and liquidity in the economy.
• The interest rate is highly dependent on the Repo Rate and understanding this relationship is crucial for investors.
• The Reserve Bank of India decides the repo rate and plays a crucial role in the country’s money circulation.
• The February 2025 rate cut to 6.25% indicates the RBI is balancing growth with inflation control, ensuring prices remain stable while encouraging business investments and consumer spending.
• Reverse repo rate is said to be that rate of interest at which the central bank (RBI in India) borrows money from the commercial banks for a short term.
• Over 1,482 branches and more than 200,000 agents/channel partners along with several bank partners.

A higher reverse repo rate encourages banks to deposit money instead of lending, reducing liquidity in the market. When the economy experiences high inflation, the RBI raises the repo rate to make borrowing more expensive, thereby reducing the money supply in the market. This helps slow down investment and spending, which can help stabilize prices. Additionally, the repo rate may be increased to prevent currency depreciation and manage economic stability. The reverse repo rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks against government securities. This mechanism allows banks to park their excess funds safely, receiving an interest return reverse repo rate definition on them.

Impact of RBI Repo Rate Cut

An increase in the repo rate and reverse repo rate is an indicator of the tightening of monetary policy. Further, to accelerate growth RBI decreases interest rates, due to which availing loans become cheaper for the customers and this infuses money into the economy. As a result the overall demand increases and thus the prices of goods and services also rise. RBI attempts to stabilize the price of the commodities, to maintain a balance in the economy. And to do so, it uses Repo Rate and Reverse Repo Rate as a tool to maintain that balance.

Understanding Repo Rate & Reverse Repo Rate: A 2025 Guide

A high repo interest rate increases EMIs, discouraging borrowing, while a lower rate reduces loan costs, boosting demand. A repo rate change triggers a chain reaction in financial markets, loan rates, corporate investments, and inflation expectations. Let’s track the repo rate shifts in India over the past decade to gain insights into economic cycles, inflation control measures, and the RBI’s monetary policy decisions. As of August 9, 2024, the Reserve Bank of India’s Monetary Policy Committee has decided to maintain the key policy repo rate at 6.50 per cent. This decision marks the ninth consecutive time the rate has been held steady, influenced by the need to keep inflation within the target range amidst strong economic demand.

That reduces the money available for lending, helping to control inflation. The reverse repo rate is applicable when the central bank borrows money from commercial banks to control the money supply in the markets. It is always less than the repo rate charged by the central bank—when it lends funds to commercial banks. The repo rate is an income for the central bank; to generate profits, it needs to be higher than the expenses. Since the repo rate primarily functions to control inflation, when inflation runs high, the RBI increases the repo interest rate, making borrowing costlier.

What is Reverse Repo Rate and Bank Rate?

To influence short-term interest levels, generally, RBI conducts Repo transactions. The two Liquidity Adjustment Facility with the Central Bank are the Repo Rate and Reverse Repo Rate. Repo Rate is the rate at which interest is charged by the central bank, i.e. As against, the Reverse Repo Rate is the rate at which interest is given to the banks which park their excess money with the Reserve Bank of India. Repurchase agreements, or repos, involve the sale of securities with the agreement to buy them back at a specific date, usually for a higher price. For the party selling the security and agreeing to repurchase it in the future, it is a repurchase agreement (RP).

An increase in the reverse repo rate is considered a contractionary monetary policy. A decrease in the reverse repo rate is considered an expansionary monetary policy step. It induces liquidity, i.e., increases the money supply in the market. These bank terms may be jargonistic, but they have a direct bearing on everything from your loan interest rates, to your returns on savings, and the general economic climate. When the repo rate goes down, you could pay less for your home loan EMIs.

• Conversely, the reverse repo rate is the rate at which the central bank borrows money from commercial banks, also against securities.
• RTGS is a system in which money is transferred in real time and on a “real-time” and “gross” basis.
• Reverse repo rate is a phenomenon that aims at absorbing all the liquidity in the market, which in turn restricts the borrowing power of the investors.
• In this blog, we’ll break down both these terms, explain how they function, and discuss the difference between repo rate and reverse repo rate in an easy-to-understand manner.
• When banks need to borrow money from the RBI, they use government bonds as collateral.

A repurchase agreement is technically not a loan because it involves transferring ownership of the underlying assets, albeit temporarily. The assets will remain on the balance sheet of the original seller even though ownership is transferred. An increase in the Repo Rate means that the banks will have to pay a higher interest rate if they borrow any amount from the RBI.

The central bank can boost the overall money supply by buying Treasury bonds or other government debt instruments from commercial banks. This action infuses the bank with cash and increases its reserves of cash in the short term. The Federal Reserve will later resell the securities back to the banks. It’s not only finance people who need to understand these bank terms.

The RBI uses this mechanism to absorb excess liquidity from the market, which helps maintain stability in the banking system. The reverse repo rate significantly influences monetary policy by managing liquidity and stabilising interest rates. By adjusting the reverse repo rate, the RBI can encourage or discourage banks from lending. A higher reverse repo rate prompts banks to deposit excess funds with the RBI instead of lending them out, reducing liquidity in the economy. Conversely, a lower rate encourages banks to lend more, increasing liquidity and stimulating economic activity. Understanding this rate helps gauge the RBI’s stance on inflation control and economic growth.