Higher Reverse Repo Rate reduces the money supply in the market as the banks park their surplus cash with the RBI to earn attractive returns as against lending to individuals and businesses. It reduces the supply of money in the system, thereby boosting the strength of the rupee. India’s reverse repo rate can be compared to rates set by other central banks, like the U.S. Each country adjusts its rate based on unique economic conditions, inflationary pressures, and financial stability goals.

Currency Circulation and Management in India: A Close-Up

They increase or decrease it based on the economic condition of the country, the market inflation, or the recession. Furthermore, repo levels have a direct impact on the cost of borrowing for banks. The greater the repo rate, the greater the cost of borrowing for banks, and vice versa. There will also be an agreement in place to repurchase them at a predetermined price. As a result, the bank receives the cash and the central bank receives the security.

Bank Mapping

The current repo rate in India is fixed at 6.50% by the RBI on 8th February 2024. In this blog, we will understand what the repo rate means, how it works, and how it affects an investor. When taking a loan from a bank or investing, the most important term is the interest rate. As of April 15, 2025, the repo rate is 6.00%, and the reverse repo rate is 3.35%. In June 2024, the RBI’s Monetary Policy Committee announced that the repo rate would remain unchanged at 6.5%. This decision was part of a continued policy stance that began in February 2023, marking the eighth time the rate was held constant.

Understanding Repo Rate and Reverse Repo Rate

The aim of this is to reduce the chances of more loans to citizens or business organizations. It’s when the central bank feels the need to take loans from commercial banks. This helps the commercial banks to earn a little interest from the central bank.

Difference Between Repo Rate vs Bank Rate

• When the RBI raises the reverse repo rate, it becomes more attractive for banks to deposit excess funds with the central bank.
• Repurchase agreements, or repos, involve the sale of securities with the agreement to buy them back at a specific date, usually for a higher price.
• A repurchase agreement involves the sale of securities to a counterparty subject to an agreement to repurchase the securities at a later date.

Understanding the difference between repo and reverse repo rate is essential for students preparing for UPSC, SSC, banking exams, or even for someone wanting to be more financially literate. The Reverse Repo Rate is the interest rate at which the RBI borrows funds from commercial banks. The reverse repo rate is the rate that the RBI pays to the commercial banks when they park their excess funds with the central bank.

How Are Your Loans And Investments Impacted By A Change In The Repo Rate?

• A decrease in the reverse repo rate is considered an expansionary monetary policy step.
• A higher repo rate makes borrowing costlier, reducing money supply, while a lower rate makes credit cheaper, boosting liquidity.
• The rise in demand ultimately accelerates the economy, improves liquidity, and controls recession.
• An increase in the Reverse Repo Rate provides an incentive to the banks to park their surplus funds with the central bank on a short-term basis, thereby reducing liquidity in the banking system.

It reduces the supply of money in the system, thus controlling inflation. Similarly, when the RBI has to stoke inflation a little, it may choose to cut Reverse Repo Rate and Repo Rate, which frees up the money supply. The repo rate is the interest rate at which the RBI lends money to commercial banks, using government securities as collateral.

The reverse repo rate plays a vital role in India’s monetary policy framework. It influences liquidity management for commercial banks and impacts overall economic conditions. Similarly, during the recession, the central bank implements expansionary monetary policies. The central bank decreases repo rates—this encourages commercial banks to borrow more from the central bank. When commercial banks have sufficient funds, they lend them to their customers—who spend them on goods and services. As of February 2025, the repo rate in India is 6.25%, following a 0.25% rate cut by the RBI.

Repo Rate & Reverse Repo Rate – Meaning, Difference, Impact etc.

Commercial banks also keep the excess funds that they receive with RBI as it is considered safe. The added benefit is that RBI will also pay interest, which gives the banks an option to earn interest on their idle money. It deposits its surplus funds worth ₹ 1 crore with RBI, @ 3.35% per annum Reverse Repo Rate. So, on the first day, Reserve Bank grants a loan to ABC bank worth ₹ 1 crore, against collateral (government securities).

A higher reverse repo rate leads to increased interest rates on loans, reducing borrowing by consumers and businesses. This dampens investment activities, potentially slowing down economic growth as fewer funds circulate within the economy. On June 17, 2021, the Federal Reserve implemented monetary policy measures to control price inflation in the US. The Fed Reserve provided an overnight reverse repurchase agreement facility by augmenting five basic points off the reverse repo rate—soaring from 0.00% to 0.05%. Banks and money market funds parked a huge sum of $755.80 billion with the Fed Reserve—within a day. Repo Rate is the rate at which Reserve Bank of India (RBI) lends money to commercial banks if the latter requires financing.

It’s essential for investors to stay informed about such monetary policy changes, as they can significantly influence investment strategies and financial planning. This results in an overall decrease in available credit and money supply leading to an increase in interest rates across the board. Banks can park their money with the RBI at a lower interest rate than the Repo Rate or Repurchase Rate. RBI earns more on what it lends to banks than its expense on what it borrows from the banks. Since RBI can’t offer higher interest on deposits and charge lower interest on loans, Repo Rate is higher than Reverse Repo.

For the party buying the security reverse repo rate definition and agreeing to sell in the future, it is a reverse repurchase agreement (RRP). High NPAs reflect banking system stress, dampening banks’ lending capacity and overall economic growth. While both rates are short-term tools used to control cash flow in the market and are frequently misunderstood as the same, there are some significant differences between the two. However, banks may not always pass on the full benefit immediately, as they also factor in deposit rates and credit risks when adjusting lending rates. The February 2025 rate cut is expected to ease loan burdens, making it an opportune time for homebuyers and businesses to reconsider borrowing decisions. The current repo rate in India stands at 6.25%, following a 0.25% cut by the RBI in February 2025.

When banks need short-term funds, they borrow from the RBI by selling eligible securities, such as Treasury Bills. The banks agree to buy back these securities at a predetermined price, a transaction called a repurchase agreement. The reverse repo rate exhibits significant fluctuations that reflect economic conditions and central bank strategies. Recent adjustments in this rate offer insights into liquidity management in India. Understanding these rates is crucial, as they influence various aspects of the economy, including loan interest rates, inflation control, and overall economic stability.

Some segments benefit from the rate increase, while others may suffer losses. The RBI recently reduced the repo rate by 25 basis points, lowering it from 5.75 percent to 5.15 percent. In the same vein, the reverse repo rate was reduced from 5.5 percent to 4.9 percent. The RBI maintains the repo rate and the reverse repo rate in response to changing macroeconomic factors. When the RBI changes interest rates, it affects all sectors of the economy, albeit in different ways. Basically, when the RBI maintains the Repo Rate at a high level, banks tend to borrow less money from the central bank due to the high cost of funds.

Reverse repo rate is a phenomenon that aims at absorbing all the liquidity in the market, which in turn restricts the borrowing power of the investors. The reverse repo rate is the interest rate at which the commercial banks lend money to the RBI. This monetary policy instrument is used to manage liquidity within the economy. When the RBI raises the reverse repo rate, it can withdraw excess liquidity from the banking system, helping reduce the inflationary pressure.