What is Repo Rate and Reverse Repo?

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What is Repo Rate and Reverse Repo?
Table Of Contents
What is Repo Rate?
How Does Repo Rate Work?
How Does RBI Calculate Repo Rate?
Latest Update on Repo Rate
Historical Repo Rates
What is Reverse Repo Rate?
Difference Between Repo Rate & Reverse Repo Rate

The world of finance and economics has many important concepts that help us understand the overall health of the economy. One such important term is the Repo Rate. This term is often discussed because it plays a key role in how financial markets work. It is also a crucial tool for banks to manage monetary policies. This guide will explain what the Repo Rate is, why it is important, and how it affects different people.

What is Repo Rate?

The repo rate (short for Repurchase Rate) is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks in the event of any shortfall of funds. It is a crucial tool used by the RBI to control inflation, liquidity and stabilize the country's economy. By adjusting the repo rate, the RBI can influence the liquidity and overall money supply in the financial system.

Repo Prate forms a vital part of the monetary policy skeleton and is usually established by the central bank to meet macroeconomic objectives. It is sometimes referred to as a repurchasing agreement or repurchasing option. Inflation is also controlled by using the same rate. 

How Does Repo Rate Work?

When commercial banks need money, they can borrow it from the RBI at the repo rate. To get these funds, banks have to give the RBI something valuable, like government bonds, as a guarantee.

Here's an example to make it clear:

Example: Imagine a bank needs ₹1 crore. They borrow this amount from the RBI at the repo rate of 6%. The bank gives government bonds worth ₹1 crore to the RBI as collateral. If the repo rate goes up to 7%, it becomes more expensive for the bank to borrow money. This means the bank might charge higher interest rates on loans to customers, making it harder for people and businesses to borrow money.

On the other hand, if the repo rate drops to 5%, it’s cheaper for the bank to borrow money. This can lead to lower interest rates on loans, encouraging more people and businesses to take loans and spend more.

How Does RBI Calculate Repo Rate?

The RBI determines the repo rate based on several economic factors, including:

Inflation: If inflation is high, the RBI may increase the repo rate to curb excess money supply.

Economic Growth: To stimulate economic growth, the RBI might lower the repo rate, making loans cheaper.

Liquidity Conditions: The RBI assesses the liquidity conditions in the financial system to decide the repo rate.

Global Economic Conditions: International economic trends can also influence the RBI's decision on the repo rate.

Latest Update on Repo Rate

The current Repo Rate in India has been fixed at 6.50% as per the announcement made by the government on 8th February 2024.

These are the latest Repo Rate and Reverse Repo Rate:

Repo Rate6.50%
Reverse Repo Rate3.35%
Bank Rate5.15%
Marginal Standing Facility Rate6.75%

Historical Repo Rates

Over the years, the repo rate has fluctuated based on the economic conditions of the country. Following is the list of the historical Repo Rates in India:

Period - Date Effective fromRepo Rates
8th February 20246.50%
8th December 20236.50%
8th June 20236.50%
8 February 20236.50%
7 December 20226.25%
30 September 20225.90%
05 August 20225.40%
08 June 20224.90%
May 20224.40%
09 October 20204.00%
06 August 20204.00%
22 May 20204.00%
27 March 20204.00%
06 February 20205.00%
07 August 20195.00%
06 June 20196.00%
04 April 20196.00%
07 February 20196.00%
01 August 20187.00%
06 June 20186.00%
02 August 20176.00%
04 October 20166.00%
05 April 20167.00%
29 September 20157.00%
02 June 20157.00%
04 March 20158.00%
15 January 20158.00%
28 January 20148.00%
29 October 20137.75%
20 September 20137.50%
03 May 20137.25%
17 March 20116.75%
25 January 20116.50%
02 November 20106.25%

What is Reverse Repo Rate?

The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks. It is the opposite of the repo rate. Banks lend money to the RBI to earn interest on their surplus funds. The reverse repo rate is a tool used by the RBI to absorb liquidity from the banking system and control inflation.

Difference Between Repo Rate & Reverse Repo Rate

Repo RateReverse Repo Rate
The rate at which the RBI lends money to commercial banksThe rate at which the RBI borrows money from commercial banks
Repo Rate controls liquidity and inflationReverse Repo Rate absorbs excess liquidity
An increase in repo rate makes loans costlier for commercial banksIncrease in reverse repo rate makes it more attractive for banks to park their surplus funds with the RBI
The interest charge that is applicable to the repo rate is through a repurchase agreement.The applicable interest charge is through a reverse repurchase agreement.

The repo rate and reverse repo rate are critical tools used by the RBI to manage the country's monetary policy. By adjusting these rates, the RBI can control inflation, influence economic growth, and ensure financial stability. Understanding these rates and their implications can help individuals and businesses make informed financial decisions.

  • How does the repo rate impact the economy?

    Changes in the repo rate influence the cost of borrowing for banks, which in turn affects loan interest rates for consumers and businesses, thereby impacting spending and investment.

  • What is the reverse repo rate?

    The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks, helping to absorb excess liquidity in the banking system.

  • How is the repo rate different from the reverse repo rate?

    The repo rate is the rate at which the RBI lends money to banks, while the reverse repo rate is the rate at which the RBI borrows money from banks.

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