Reverse Repo Rate

Reverse Repo Rate: Meaning And Its Effect

RBI revised its repo rate by 40 basis points to 4.00% on 22 May 2020. Its previous revision was to 4.4% on 27 March 2020. The previous repo rate set on 4 October 2019 was 5.15%. The latest repo rate reduction is 75 basis points, which is the highest cut in a decade. The reverse repo rate now stands at 3.35%.

Currently, the reverse repo rate is 3.35%, down 40 basis points (bps). Previously, the reverse repo rate was at the rate of 3.75%.  In order to understand how this affects you and your loans, you need to know the difference between the repo rate and the reverse repo rate.

Repo Rate

Commercial banks seeking funds from the Reserve Bank of India are charged an interest rate.

Both parties sign an agreement stating that the securities will be repurchased on a particular date at a predetermined price with an interest rate of Rs.1,000.

A repo rate in India is set and monitored by India’s central bank, the Reserve Bank of India, as a way to control liquidity and inflation.

To decrease the money supply in the economy, the RBI will hike up the repo rate to discourage banks from borrowing funds.

5 Major differences between Repo Rate and Reverse Repo Rate

Besides the way these rates work, there are other differentiators you should know of:

  • A high repo rate helps drain excess liquidity from the market, whereas a high reverse repo rate helps inject liquidity into the economic system.
  • The repo rate is always higher than the reverse repo rate.
  • Repo rate is used to control inflation, and reverse repo rate is used to control the money supply.

A rise in the repo rate will cause commercial banks to borrow less, whereas a rise in the reverse repo rate will allow them to transfer more funds to RBI, which will make the money supply grow.

Read Also: Everything To Know About Digital E Kyc Verification

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