Repo Rate & Reverse Repo: Meaning & Key Differences Explained

Reverse repo rate and repo rate set by the RBI are specific monetary policy tools. The policies that govern these rates help manage the country’s overall economy. Specific factors like inflation, currency rate changes and money flow influence these rates.  

Read the information below to define repo rate and reverse repo rates and learn how they impact the economic situation within the country.

Current Repo Rates

At present, the repo rate in India is 6.50%. This remains unchanged after the RBI’s announcement on August 8, 2024. This updated rate came after the last change in February 2023, when it was 6.25%.

Reserve Bank of India Repo Rate

The revised repo rates, according to the Reserve Bank of India, are:

Repo Rate Today	6.50%
Reverse Repo Rate	3.35%
Bank Rate	6.75%
Marginal Standing Facility Rate	6.75%

Disclaimer: These rates are current as of December 2024. Since rates are updated regularly, make sure to check the latest rates. 

What is the Repo Rate?

The abbreviation ‘repo’ stands for Repurchasing Option or Repurchasing Agreement. The Reserve Bank of India (RBI) fixes the repo rate for commercial banks to borrow funds against collateral. 

To deal with volatile market situations or to maintain liquidity, commercial banks borrow funds from the RBI, according to this rate. According to the announcement in December 2023, the repo rate has remained unchanged from the previous rate of 6.50%.

Impact of Repo Rate Change on Borrowers

A change in the repo rate is directly reflected over the cost of borrowing. If the repo rate increases, your cost of borrowing also increases. Similarly, the cost of borrowing will decrease with a declining repo rate. 

Why? When the repo rate increases, it becomes difficult or costs more for banks to get capital from RBI and so, banks increase the interest rates. Likewise, you get loans at affordable rates if the RBI lowers the repo rate.

Relationship Between Repo Rate and Inflation

This rate plays a crucial role in maintaining stability and keeping control over the economic flow of money. The RBI increases the repo rate to regulate cash flow and incline borrowing costs, specifically with the rise of inflation. 

When the overall money supply within the economy declines, the lending activities by banks also reduce. This reduction can lead to less overall consumer spending, investment and demand. Thus, it controls price stability and inflation.

What is the Reverse Repo Rate?

To control the overall market supply of money the reverse repo rate is another useful tool. As the name states, it is the rate at which the RBI borrows money from banks within the country. Placing funds with RBI is a safe option that most commercial banks have. 

Commercial banks can get more incentives for depositing funds with the Central Bank when the reverse repo rate by the RBI increases. Overall, this can lead to a decrease in the availability of loans as well as the money supply within the economy. 

As per the latest announcements, the reverse repo rate in India is stable at 3.35%. It is important to understand that reverse repo rates are always lower than the repo rates.

Difference Between Reverse Repo Rate and Repo Rate

Check the following table to know the differences between repo and reverse repo rates in India:

Parameter	Repo Rate	Reverse Repo Rate
Lender and Borrower	The RBI offers money to commercial banks	The RBI borrows money from commercial banks
Operational Mechanism	Banks offer their securities as collateral to gain funds and buy them back	The RBI pledges its securities to deposit funds and get loans
Objective	To promote price stability and money deficiency	To control the availability of money
Impact of Rate Hike	A hike in repo rate discourages banks from borrowing; as the repo rate rises, the interest rate increases too	Banks prefer to deposit surplus funds with the RBI to earn interest, leading to a fall in the money supply
Impact of Decrease in Rate	Lower repo rates encourage lending with lower interest rates	Banks reduce deposits with the RBI and lend more to the public

As mentioned above, an upward repo rate can increase your loan’s interest. An increase in the reverse repo rate can also impact its availability. Such changes can impact your ability to receive desired loan amounts. To equip yourself to deal with financial needs during such times, it is best to create an emergency fund. You can also invest in liquid options, be it mutual funds or fixed deposits. 

FAQs on Repo and Reverse Repo Rate

What is the current repo and interest rate?

As per the recent changes in December 2023, the repo rate in India is 6.50%. An increase in repo rate allows for an increase in interest rates on loans.

Who sets the reverse repo rate?

The Reserve Bank of India sets the reverse repo rate. It is a monetary policy instrument to control the money supply in the economy by the RBI.  

What is a repo rate with an example?

The current repo rate is 6.50%. So, if a commercial bank borrows ₹1 lakh from the RBI, it will have to pay an interest of ₹6,500. 

Is the repo rate good or bad?

While the repo rate may affect borrowing costs, it is an essential tool to control the money supply and promote price stability in the economy. 

Is the reverse repo rate fixed?

The reverse repo rate is currently unchanged by the RBI, stable at 3.35%, whereas the repo rate is unchanged at 6.50%.