Repo Rate and Reverse Repo Rate?
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In this article, let’s discuss repo rate and reverse repo rate, and find out the differences between the two.
- Repo rate is charged by the RBI when commercial banks borrow funds by leveraging securities.
- The reverse repo rate is defined as the rate at which banks earn interest, as they park surplus funds with the Reserve Bank of India (RBI).
- While the repo rate helps in controlling inflation, the reverse repo rate increases liquidity.
- It should be noted that the repo rate set by the RBI is always higher than the reverse repo rate.
- You will be able to check the repo rate and the reverse repo rate on the RBI website.
If you deposit money in a bank, the bank is entitled to pay you interest. On the other hand, if you borrow money from the bank, the bank imposes interest on the funds borrowed. Spare a thought, where does the bank find the funds to loan us the money? Banks either make use of the deposits in their custody or borrow money from the central bank of our country, which is the Reserve Bank of India (RBI). Repo rate and reverse repo rate is basically the interest rates charged on the transactions between the RBI and commercial banks. The article explains these terms in detail and also tries to find the difference between repo rate and reverse repo rate.
What is Repo Rate?
Repo rate is the rate which RBI charges when commercial banks borrow funds from it. Commercial banks make use of government securities like treasury bills and bonds as collateral while borrowing money from the RBI. Hence, the repo rate is the lending rate which is charged by the RBI.
‘Repo’ stands for repurchasing agreement/option. RBI and the bank agree upon repurchasing securities at a predetermined price and rate. Repo rate helps RBI to control inflation in the economy of the country.
What is Reverse Repo Rate?
The reverse repo rate is opposite to RBI’s repo rate. Here, the reverse repo rate is applied to the interest paid by the RBI. In case banks have surplus money, they can deposit funds with the RBI and earn interest. The rate is called the reverse repo rate.
Those excess funds help RBI create liquidity in the economy. In addition, lowering the reverse repo rate helps RBI in increasing the purchase power in the country.
Differences
Parameter
Meaning
Repo Rate
Repo rate is applied on the interest payable as commercial banks borrow money from the Reverse Bank of India in exchange for securities at a pre-agreed rate and time.
Reverse Repo Rate
Reverse repo rate is the rate at which commercial banks earn interest if they park excess funds with the RBI.
Impact
A high repo rate results in high cost of funds for commercial borrowers, making loans expensive and vice versa.
High reverse repo rate causes lower liquidity in the economy and vice versa.
Agreement
Repo rate is charged on repurchasing agreement.
Reverse repo rate is charged on the reverse repurchasing agreement.
Uses
Repo rate helps RBI to control inflation
Reverse repo rate helps RBI to control the supply of money.
Conclusion
Like how we depend on banks for our financial needs, banks also need an entity which they can rely on. The RBI is that entity in our country that distributes and borrows funds while applying the repo and reverse repo rates. Remember, the repo rate will always be higher than the reverse repo rate. RBI’s monetary income is indicated by the difference between the two rates.
Read more:Buoyant Force
Check your knowledge
Answer) Reserve Bank of India.
Answer) Repo rate.
Answer) Repo rate and reverse repo rate is basically the interest rates charged on the transactions between the RBI and commercial banks.