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Sujai Adithya
Business Development and Banking & Financial Services Expert
Asked a question 10 months ago

What is the difference between Repo Rate and Reverse Repo Rate?

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Sujai Adithya
Business Development and Banking & Financial Services Expert

Repo rate:

  • A repo rate is the short form of repurchase rate
  • A repo rate is also called as the cost of credit.
  • A repo rate is managed by the central authority of the government (RBI in India).
  • The main function of repo rate is to increase the flow of money in the economy and to maintain liquidity.
  • When in a market, there is a lack of liquidity the interest rate3 is raised and vice a versa.
  • A repo rate is a rate at which the central bank grants a loan to the commercial banks3 against government securities.
  • Central bank used this function to control the inflation in the economy and to reduce the borrowings of the commercial banks.
  • In simple language, a rate at which RBI lends money to commercial banks, by an agreement that banks will repurchase the same pledged securities at a future date with predetermined price, against pledge of government securities when banks needed a fund to meet their day to day transactions.

Reverse repo rate:

  • A reverse repo rate is a rate by which the government securities are sold by the central authority in an auction.
  • It is a monetary instrument used to maintain supply in the market.
  • A reverse repo is the opposite of the repo rate.
  • A reverse repo rate is a rate at which the commercial banks give a loan to the central authority.
  • A reverse repo rate is always lower than the repo rate.
  • If a reverse repo rate increases will decrease the money supply3 and if it decreases, the money supply increases.
  • If a reverse repo rate increases it will beneficial to the commercial banks means a commercial bank can invest more money in the commercial bank.

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