Photo: Mint
Photo: Mint

Explained: What are repo and reverse repo rates?

The repo rate or the repurchase rate is the rate at which RBI lends money to banks, when banks face shortage of funds

Each time the Reserve Bank of India (RBI) is set to review its monetary policy, you hear expectations on repo and reverse repo rates from different stakeholders like banks, industry and analysts.

This is often called the policy rate. The repo rate or the repurchase rate is the rate at which RBI lends money to banks, when banks face shortage of funds. These are short-term, usually overnight borrowings. This is done using government securities. RBI buys government bonds from banks and agrees to sell them back to banks at a fixed rate.

When RBI reduces the repo rate, banks get money at a cheaper rate. When RBI increases the rate, borrowing from RBI becomes more expensive. This creates an impact on the final consumers of credit, which could be institutions, businesses or individual borrowers.

The opposite of repo rate is reverse repo rate. This is the rate at which RBI borrows funds from other banks for the short term. Here, RBI sells government bonds to banks with a promise to buy back the bonds from the banks in future. When banks have excess funds with them, reverse repo allows banks to deposit these funds with RBI and earn interest on them at the same time.

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