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What is Reverse Repo Rate? Difference Between Repo Rate Vs Reverse Repo Rate

  • Highlights:

  • Reverse repo rate helps RBI control liquidity in the economy

  • Repo rate helps RBI control inflation in the economy

  • RBI policy rate changes affect the interest rate on loans

  • Get affordable terms with a Bajaj Finserv Personal Loan

When it comes to borrowing via financial instruments such as retail loans, it is crucial to know the factors that affect the cost of the loan. With any financial instrument, there are several factors such as the interest rate, tenor, and fees that are usually well known, but there are those that remain unnoticed. Among these is the reverse repo rate, and it is a very important number that can help borrowers who want to save on interest. But what is reverse repo rate and is there a difference between repo rate and reverse repo rate?

Like the repo rate, the reverse repo rate is a tool used by the Reserve Bank of India to inject funds and maintain liquidity in the economy. The importance of the repo rate and reverse repo rate extends to loans as well as investments and their yield. There are major differences between repo and reverse repo rates although they do serve a similar purpose, that is, to ensure economic stability.

Over the course of a year, these rates are revised and this is why you must be aware of what are repo rate and reverse repo rates as soon as they are announced. Comparing repo rate vs reverse repo rate is a good way to learn all about these tools. To help you do just that, here’s a breakdown of repo vs reverse repo.

Must Read: Why frequent flyers should pick a Flexi interest-only loan?

What is Reverse Repo Rate?

Contrary to the repo rate, the reverse repo rate is the interest rate at which the RBI borrows from commercial banks when needed. Here, banks deposit surplus funds with the RBI at a favourable rate and earn interest on it. As such, the RBI injects liquidity into the economy and increases purchasing power in the economy when it lowers the reverse repo rate.

It is important to note that a key difference between repo and reverse repo rate is that the repo rate will always be higher in comparison. This is because a higher reverse repo rate would encourage banks to store funds with the RBI rather than make it available for lending. The difference between the repo rate and reverse repo rate is indicative of the RBI’s income.

Must Read: What is Repo Rate and How Does Repo Rate Impact On Personal Loan?

What is Repo Rate?

The repo rate is the interest rate that the Reserve Bank of India (RBI) imposes on loans that commercial banks avail from the RBI against government securities like treasury bills. Repo, which stands for repurchasing agreement or repurchasing option is a repurchasing agreement that both, the RBI and the bank agree to, stating the repurchase of said securities on a given date and at a determined price. Using the repo rate, the central bank can establish control over inflation in the country.

Must Read: Factors That Affect Your Loan Interest Rate

What Are the Key Points of Difference Between Repo Rate and Reverse Repo Rate?

As mentioned, the reverse repo rate is never higher than the repo rate. Currently, there is 0.65% difference between the two. For a more detailed breakdown of the differences, consider this table.

Reverse Repo Rate Repo Rate
Commercial banks deposit excess funds with the RBI and earn interest Commercial banks provide securities to the RBI to get funds and repurchase securities at a pre-determined rate and time
Increase in rate results in lower liquidity in the economy as banks invest with the RBI Increases in rate results in high cost of funds, which makes loans costlier
Decrease in rate results in higher liquidity in the economy Decrease in rate results in lower cost of funds, which supports lending
Charged on the reverse repurchasing agreement Charged on the repurchasing agreement
Helps the RBI control money supply Helps the RBI control inflation

What is the Repo Rate and Reverse Repo Rate Currently?

The current repo rate is 4.00%, while the reverse repo rate is 3.35%. Both these rates experienced at 40 basis point cut on 22 May, 2020. As of the August 2020 Monetary Policy Committee meeting, the RBI has maintained the rates without any change.

Additional Read : What is Compound Interest & Simple Interest: How to Calculate It

Understanding what is repo and reverse repo is the first step, and keeping updated about them is the next. Whether you’re investing or in the market for a loan, financial reforms from the RBI regarding these rates should be on your radar. The importance of repo rate and reverse repo rate is particularly apparent in a high rate regime when the cost of borrowing across the market is expensive. However, even in an unfavourable economic climate, you should still take the time to scout for an offering that truly complements your finances.

The Bajaj Finserv Personal Loan is one such offering that you should definitely consider. With it you get access to a high-value sanction and flexible repayment plans on attractive, pocket-friendly terms. You can get up to Rs.25 lakh at a competitive interest rate and for a tenor that ranges up to 60 months. With this offering, loan processing is a breeze owing to its minimal requirement for documentation and the relaxed eligibility criteria. Further, you also enjoy provisions like online loan application, instant approval, and same-day disbursal! For all these benefits and more, check your pre-approved offer today and borrow without any hassles.

The content of this document is meant merely for information purposes. The personal loan features mentioned in this article are subject to updation, completion, revision, verification and the same may change materially based on policy revisions. For more details, please visit our Personal Loan terms and conditions page here.

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