2 min read
05 Jan 2021

When it comes to borrowing via financial instruments such as retail loans, it is crucial to know the factors that affect the loan cost. With any financial instrument, several factors such as the interest rate, tenor, and fees are usually well-known, but there are those that remain unnoticed. Among these is the reverse repo rate, and it is a significant 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, a 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, investments and their yield. There are significant differences between repo and reverse repo rates, although they do serve a similar purpose, that is, to ensure economic stability.

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

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What is the reverse repo rate?

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

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

Additional Read: What is repo rate, and how does repo rate impact the personal loan?

What is a 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.

Additional Read: Factors that affect your loan interest rate

What are the key points that determine the difference between repo rate and reverse repo rate?

As mentioned, the reverse repo rate is never higher than the repo rate. Currently, there is a 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
  • Increase in rate results in lower liquidity in the economy as banks invest with the RBI
  • Decrease in rate results in higher liquidity in the economy
  • Charged on the reverse repurchasing agreement
  • Helps the RBI control money supply
  • 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 a high cost of funds, which makes loans costlier
  • Decrease in rate results in a lower cost of funds, which supports lending
  • Charged on the repurchasing agreement
  • Helps the RBI control inflation


What is the repo rate and reverse repo rate currently?

The current repo rate is 4.40% as of 4th May 2022, while the reverse repo rate remains unchanged is 3.35%.

Additional Read: What is compound interest and simple interest: How to calculate it

Understanding what repo and reverse repo is, is the first step and keeping updated about them is the next. Whether you’re investing or you’re in the market for a loan, financial reforms from the RBI regarding these rates should be on your radar. The importance of repo 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 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 a tenor that ranges up to 60 months. With this offering, loan processing is a breeze due to its minimal requirement for documentation and the relaxed eligibility criteria. Further, you also enjoy provisions like online loan applications, instant approval, and same-day disbursal! For all these benefits and more, check your pre-approved offer today and borrow without any hassles.
 

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