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Repo Rate and Reverse Repo Rate: Repo Rate and Reverse Repo Rate in India are determined by the Monetary Policy Committee (MPC) chaired by the Governor of the Reserve Bank of India (RBI). Its decision is taken in the bi-monthly meeting of the committee. The RBI Governor exercises monetary policy decisions with the support and advice of the members of the internal Monetary Policy Committee (MPC) and the Technical Advisory Committee. Both rates are set by the RBI at its bi-monthly Monetary Policy Committee. Repo rate helps in controlling inflation in the market and on the other hand, reverse repo rate helps in controlling the supply of money in the market. In this article, we have provided all the important information related to repo rate and reverse repo rate.
What is Repo Rate?
Just as a person needs money and if there is no money in his account, he takes a loan from the bank, on which interest also has to be paid. Similarly, banks can also borrow from RBI as per their need, the interest rate with which they have to repay this loan is called repo rate. Commercial banks take loans from RBI when there is shortage of money and the demand for loans is high. Therefore, to meet the market demand, commercial banks borrow as per the repo rate to obtain capital from RBI. Repo rate instrument is also used by RBI to control inflation. Whenever there is excess money in the market, RBI will increase the repo rate to absorb that excess money and control inflation.
What is the impact of repo rate on the common man – (repo rate Impact on people?) –
If the bank gets loan from RBI at low interest rate, then customers also get loan at cheap interest rate. In other words Paying less interest on personal loan, home loan and car loan also when repo rate is low. Whereas if the repo rate increases then banks will also charge you more interest.
Example of Repo Rate: Repo rate is similar to the way commercial banks charge interest from their customers for home or car loans.
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What is reverse repo rate? ,What is Reverse Repo Rate?)
When commercial banks deposit the remaining amount with RBI after the day's work, on which RBI pays interest to the bank. The interest rate at which RBI gives interest on this amount kept by commercial banks is called reverse repo rate. It is always lower than the repo rate.
Impact of change in reverse repo rate on common man (Reverse Repo Rate Impact on people)
Whenever there is excess cash with banks, the risk of inflation in the country also increases, in such a situation RBI increases the reverse repo rate, so that commercial banks keep more and more money with RBI to earn interest. Due to which banks are left with less money to distribute in the market and the risk of inflation is reduced.
Example of Reverse Repo Rate: When banks generate additional money, they can deposit the money in the RBI for additional profits.
Difference between Repo Rate and Reverse Repo rate
Both repo rate and reserve repo rate are decided by the Monetary Policy Committee (MPC) chaired by the RBI Governor. Here we have provided the difference between repo rate and reverse repo rate, which candidates can see in the table given below.
| Repo rate | Reverse Repo rate |
| Repo rate is the rate at which RBI lends money to commercial banks. | Reverse repo rate is the rate at which RBI borrows money from commercial banks |
| It is always higher than the reverse repo rate | It remains less than the repo rate |
| It is used to control inflation and deficiency of funds. | It is used to manage cash-flow |
| It is used to meet the deficiency of funds. |
It is used to manage liquidity in the economy |
|
Current Repo Rate: 4.40% |
Current reverse repo rate: 3.35% |
|
Repo rate helps RBI to control inflation |
Reverse repo rate helps RBI to control money supply. |
Marginal Cost of Funds Based Lending Rates (MCLR) – Know what is MCLR?, MCR Lending Rate
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