What is the difference between Repo Rate and Reverse Repo Rate?
• Repo rate is the rate of interest at
which the reserve bank grants short term loans to commercial banks to meet
shortfall of funds faced by these banks.
• Reverse repo is the rate of
interest at which the reserve bank borrows money from commercial banks to
absorb liquidity in the economy
repo (Repurchase) Rate
Repo rate is the rate at which banks borrow funds
from the RBI to meet the gap between the demand they are facing for money
(loans) and how much they have on hand to lend.
If the RBI wants to make it more expensive for the
banks to borrow money, it increases the repo rate; similarly, if it wants to
make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate.
The rate at which RBI borrows money from the banks
(or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses
this tool when it feels there is too much money floating in the banking system
If the reverse repo rate is increased, it means the
RBI will borrow money from the bank and offer them a lucrative rate of
interest. As a result, banks would prefer to keep their money with the RBI
(which is absolutely risk free) instead of lending it out (this option comes
with a certain amount of risk)
Consequently, banks would have lesser funds to lend
to their customers. This helps stem the flow of excess money into the economy
Reverse repo rate signifies the rate at which the
central bank absorbs liquidity from the banks, while repo signifies the rate at
which liquidity is injected.