Difference Between Repo Rate and Reverse Repo Rate

The Reserve Bank of India (RBI) lowered its repurchase rate by 25 basis points (BPS) on April 9, 2025, reducing it from 6.25% to 6% during the Monetary Policy Committee (MPC) led by Royal Bank Governor Sanjay Malhotra during the meeting.

The April RBI policy meeting, scheduled between April 7 and 9, amid global trade tensions and high market volatility, amid reciprocity tariffs recently announced by U.S. President Donald Trump, which has sparked concerns about a global recession.

You are watching: Difference Between Repo Rate and Reverse Repo Rate

The six-member MPC also changed its policy stance from “neutral” to “adaptive”, which means it will be more open in the future. RBI MPC also decided to cut GDP growth in 2025-26 from 6.7% in the early stages to 6.5%. The Reserve Bank of India also forecasts consumer-based inflation (CPI) to be 4%, from 4.2% in FY26.

In this article, we will understand the difference between a repurchase rate and a reverse repurchase rate.

What is the repo rate?

In banking business, the repurchase rate refers to the “repurchase option” or “repurchase agreement” interest rate.

According to the Reserve Bank of India (RBI), “Repurchase is a money market instrument that can be used to mortgage short-term borrowing and loans through the sale/purchase action of debt instruments.”

In short, the repurchase rate is the rate at which the Reserve Bank of India lends to commercial banks for short-term demand to cope with government securities such as fiscal bills or government bonds as collateral.

See more : Spot 3 differences between the pictures of a girl purchasing groceries in 21 seconds!

Repurchase rates are a key tool used by central banks to manage economic inflation and liquidity. The repurchase rate has a direct impact on loans and EMIs for automobiles, housing, education, personal or commercial, credit card and mortgage loans.

Lower repo rate:

When the Reserve Bank of India (RBI) lowered its repo rate, it became cheaper for banks to borrow money from the Reserve Bank of India. This encourages banks to lend more to businesses and individuals, thereby increasing the overall money supply in the economy.

Higher repo rate:

On the contrary, lending becomes more expensive for banks when the Reserve Bank of India raises its repurchase rate. This can prevent bank loans, resulting in a decrease in the money supply and potentially curb inflation.

What is the reverse repo rate?

The reverse repurchase rate is the rate at which the Reserve Bank of India borrows from commercial banks. This is the opposite of the buyback rate. The reverse repurchase rate is the rate that the Reserve Bank of India pays to commercial banks when the central bank is parked.

Reverse repurchase rates help absorb excess liquidity from the banking system, thereby reducing the overall money supply. By reducing the money supply, the Reserve Bank of India can help control inflation and maintain financial stability.

See more : Optical Illusion: If you have Eagle Eyes find the Word Lead among Bead in 20 Secs

Higher reverse repo rate:

When central banks raise the reverse repurchase rate, it becomes more attractive for commercial banks to park their surplus funds at higher rates at central banks (e.g., the Reserve Bank of India). This reduces the amount banks can lend to businesses and individuals, thereby reducing the overall money supply of the economy.

Lower reverse repo rate:

When central banks lower the reverse repurchase rate, the attractiveness of commercial banks to deposit their funds into central banks is reduced. Banks are more likely to lend their funds than to get lower interest rates on central bank deposits, thus increasing the economic supply.

Key Differences between Repurchase Rate and Reverse Repurchase Rate

Before looking at the table, let’s understand a simple analogy. The repurchase rate is considered as interest charged by the Reserve Bank of India when it contributes to the bank. The reverse repurchase rate is the interest paid by RBI when making money from a bank.

Comparison table: Repurchase rate vs. Reverse repurchase rate

in conclusion

In the world of banking and finance, two terms that often appear in headlines and economic discussions are the repurchase rate and the reverse repurchase rate. These two interest rates play a crucial role in a country’s monetary policy, especially in controlling inflation, managing liquidity and affecting economic growth.

When people read headlines like “RBI raises repo rates by 25 basis points” or “reverse repo rates remain the same”, it is important to understand what exactly these terms mean and why they are so important. It directly affects home loan EMI, savings rates and inflation trends. These are not only technical terms limited to economists – they affect our daily lives. Understanding the difference between repo rates and reverse repo rates is essential for students who are UPSC, SSC, bank exams, and even for those who want to have more financial knowledge.

Source: https://dinhtienhoang.edu.vn
Category: Optical Illusion