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Q.

What is the difference between repo rate and reverse repo rate?

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Repo rate is the rate at which the Reserve Bank of India provides loans to commercial banks against government securities. On the other hand, the reverse repo rate is the interest provided by the RBI to banks who deposit funds with them. Now, let me tell you what is the difference between repo rate and reverse repo rate.

Difference Between Repo and Reverse Repo Rate
Parameters Reverse Repo Rate Repo Rate
Controls

Money supply in the economy.

Inflation

Rate of interest

Lower than the repo rate.

Higher than the reverse repo rate.

Function

Commercial banks deposit their excess funds with RBI and receive interest on their deposits.

RBI provides funds to commercial banks against government securities.

Borrower’s objective

To reduce the overall money supply in the economy.

To manage short-term fund deficiency.

Purpose

To ensure liquidity in the economy

To fulfill the deficiency of funds.

Impact of lower rate

As banks lend more and reduce their deposits with the RBI, the money supply increases in the economy

Loans become cheaper as the cost of funds reduces for commercial banks.

Impact of higher rate

As commercial banks park more surplus funds with RBI, the money supply in the economy decreases.

Loans become expensive as the cost of funds increase for commercial banks.

Charged on

It is charged on Reverse Repurchase agreement.

It is charged on Repurchase agreement.

Impact of Repo Rate on EMIs

Generally, a low repo rate means low-cost loans for people. When the Reserve Bank of India reduces its repo rate, banks also lower their interest rates charged on loans. This decreases the EMI. Similarly, high repo rates mean loans for the customer gets more costly due to the increase in the interest rates.

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I hope now you know about the repo rate and reverse repo rate difference.

Read more: What is Repo Rate? What is Current Reverse Repo Rate?
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