Repo Rate and Reverse Repo Rate

The repo rate is the interest rate at which commercial banks borrow money from the central bank, while the reverse repo rate is the interest rate at which commercial banks deposit money with the central bank. Explore key differences between repo rate and reverse repo rate in this guide.
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2 min
01 July 2025

Understanding the intricacies of monetary policy is crucial for anyone interested in finance or economics. Among the many tools available to central banks, the repo rate and reverse repo rate are two of the most significant. These rates play a pivotal role in controlling the money supply, inflation, and overall economic stability.

The repo rate is the interest rate at which commercial banks borrow funds from the central bank by selling their securities, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks. These rates are adjusted by the central bank to regulate liquidity in the economy.

A higher repo rate makes borrowing costlier, reducing money supply and controlling inflation, whereas a lower repo rate encourages borrowing and spending, boosting economic growth. Conversely, the reverse repo rate helps absorb excess liquidity by offering banks a secure way to park their funds.

These rates significantly impact loan interest rates, particularly home loans, as banks adjust lending rates based on changes in the repo rate. Understanding these factors can help individuals make informed financial decisions.

What is the repo rate?

The repo rate, short for repurchase rate, is the rate at which the central bank of a country (such as the Reserve Bank of India) lends money to commercial banks. These loans are typically short-term, often overnight, and are secured by government securities. The central bank uses the repo rate as a tool to manage liquidity in the economy and control inflation.

  • Control inflation: By increasing the repo rate, the central bank makes borrowing more expensive for commercial banks. This leads to higher interest rates for consumers and businesses, reducing spending and slowing down inflation.
  • Encourage borrowing: Conversely, by lowering the repo rate, borrowing becomes cheaper, encouraging spending and investment, which can stimulate economic growth.

RBI cuts repo rate by 100 bps in 2025

In 2025, the Reserve Bank of India (RBI) has cut the repo rate by a total of 100 basis points (bps). This includes two earlier reductions of 25 bps each, followed by a sharper 50 bps cut in the latest policy meeting. The move signals the RBI’s strong intent to boost credit growth and economic activity by lowering borrowing costs. The current repo rate is now more favourable for borrowers, especially those with loans linked to this benchmark.

Home loan borrowers, particularly those on floating interest rates linked to the repo rate, may benefit from reduced EMIs. However, not all borrowers will see immediate relief. Many loans are still linked to older benchmarks like the Marginal Cost of Funds-Based Lending Rate (MCLR), which responds more slowly to rate changes. This means the transmission of rate cuts may be delayed or only partially passed on by banks.

Even though repo rate-linked loans offer quicker and more transparent rate adjustments, not all borrowers have shifted to this model. Older loans tied to the MCLR or base rate continue to reflect slower changes. Despite this, the RBI’s rate cuts reflect a determined effort to revive lending and support economic momentum in 2025.

What is the Reverse Repo Rate?

The reverse repo rate is the interest rate at which the central bank borrows money from commercial banks. It acts as a tool to control excess liquidity in the economy and regulate inflation.

  • Absorbing excess liquidity: When there is surplus money in the banking system, the central bank increases the reverse repo rate to encourage banks to deposit their excess funds, reducing money supply.
  • Ensuring financial stability: By managing liquidity through the reverse repo rate, the central bank prevents excessive lending, which could lead to inflationary pressures or asset bubbles.

This rate plays a crucial role in shaping monetary policy and maintaining economic balance.

What is the reverse repo rate today?

As of June 24th, 2025, the Reserve Bank of India's reverse repo rate remains at 3.35%. This is the interest rate paid to commercial banks when they park excess funds with the RBI under the Liquidity Adjustment Facility (LAF). By offering this rate, the RBI absorbs surplus liquidity from the banking system, helping to stabilise monetary conditions. While the repo rate influences borrowing, the reverse repo helps regulate overall liquidity and keep inflation in check.

Key differences between repo rate and reverse repo rate

Repo and reverse repo rates are crucial tools used by central banks to manage liquidity and control inflation, influencing the flow of money in the economy.

Key Aspect

Repo Rate

Reverse Repo Rate

Purpose and Function

Provides short-term loans to banks to inject liquidity and stimulate the economy.

Absorbs excess liquidity from the banking system to control inflation and maintain stability.

Impact on Liquidity

Lower repo rate increases liquidity by making borrowing cheaper for banks.

Higher reverse repo rate decreases liquidity by encouraging banks to deposit surplus funds with the central bank.

Influence on Interest Rates

Directly affects interest rates on loans provided by banks. A higher repo rate increases loan interest rates.

Indirectly affects interest rates by influencing the amount of money banks can lend.

Lender and Borrower

The lender is the RBI, and the borrower is the commercial bank.

The lender is the commercial banks, and the borrower is the Reserve Bank of India.

Objective

To manage a short deficiency of funds.

To reduce the overall supply flow of money in the economy.

Rate of Interest

Higher than the reverse repo rate.

Lower than the repo rate.

Interest Charge Mechanism

Applicable through a repurchase agreement.

Applicable through a reverse repurchase agreement.

Mechanism of Operation

Commercial banks get funds from RBI using government bonds as collateral.

Commercial banks deposit their excess funds with the RBI and earn interest on the deposit.

Impact of Higher Rate

Increases the cost of funds for commercial banks, making loans more expensive.

Lowers the money supply in the economy as commercial banks park more funds with the RBI.

Impact of Lower Rate

Decreases the cost of funds for commercial banks, leading to lower interest rates on loans.

Increases the money supply in the economy as banks lend more and reduce deposits with the RBI.

 

Impact of repo rate and reverse repo rate on home loans

The repo rate and reverse repo rate significantly impact interest rates on various financial products, including home loans. When the repo rate is high, banks face higher borrowing costs from the central bank. Consequently, they increase interest rates on loans, including home loans, to maintain their profit margins. Conversely, when the repo rate is low, banks can afford to offer lower interest rates on home loans, making borrowing cheaper for consumers.

For instance, during periods of economic slowdown, central banks may lower the repo rate to stimulate growth. This reduction in the repo rate can lead to lower home loan interest rates, encouraging more people to invest in real estate. Therefore, understanding these rates can help potential homebuyers make informed decisions about the timing of their home loan applications.

Planning to buy your dream home? With repo rate changes creating favourable borrowing conditions, now could be the perfect time to explore home financing options. Bajaj Finserv offers competitive home loan rates starting from 7.49%* p.a Check your eligibility today. You may already be eligible, find out by entering your mobile number and OTP.

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Impact on other financial products

Apart from home loans, the repo rate and reverse repo rate also affect other financial products, such as:

  • Personal loans: Similar to home loans, the interest rates on personal loans are influenced by changes in the repo rate. A lower repo rate can result in lower interest rates on personal loans, making borrowing more affordable.
  • Fixed deposits: The interest rates on fixed deposits (FDs) are also impacted by the repo rate. A higher repo rate can lead to higher interest rates on FDs, making them a more attractive investment option.
  • Savings accounts: The interest rates on savings accounts may also fluctuate based on changes in the repo rate, although the impact is generally less pronounced compared to loans and fixed deposits.
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How central banks use repo and reverse repo rates

1. Controlling inflation

Central banks use the repo rate and reverse repo rate as tools to control inflation. By adjusting these rates, they can influence the amount of money in circulation. For instance:

  • Raising the repo rate: To combat high inflation, the central bank can raise the repo rate, making borrowing more expensive. This reduces spending and helps to bring down inflation.
  • Raising the reverse repo rate: Similarly, increasing the reverse repo rate encourages banks to park their excess funds with the central bank, reducing the money supply and helping to control inflation.

2. Stimulating economic growth

During periods of economic downturn, central banks may lower the repo rate to stimulate growth. By making borrowing cheaper, they encourage spending and investment, which can help to boost economic activity. Similarly, lowering the reverse repo rate discourages banks from depositing their surplus funds with the central bank, increasing the money available for lending and investment.

The role of repo and reverse repo rates in financial planning

1. For individuals

Understanding the repo rate and reverse repo rate can help individuals make informed decisions about their finances. For example:

  • Home loans: Potential homebuyers can monitor changes in the repo rate to identify the best time to apply for a home loan. A lower repo rate can result in lower interest rates, reducing the overall cost of the loan.
  • Investments: Investors can use information about the repo rate to make strategic decisions about their investments, such as choosing between fixed deposits and other investment options.

Smart financial planning includes securing the right home loan at the right time. With current market conditions favouring borrowers, exploring home financing options from trusted lenders like Bajaj Finserv can help you make the most of these opportunities. Check your loan offers for a home loan from Bajaj Finserv. You may already be eligible, find out by entering your mobile number and OTP.

2. For businesses

Businesses can also benefit from understanding the repo rate and reverse repo rate. For instance:

  • Borrowing costs: Companies can monitor changes in these rates to anticipate changes in borrowing costs and plan their financing strategies accordingly.
  • Cash management: Businesses can optimize their cash management strategies by understanding how these rates impact liquidity in the banking system.

Conclusion

The repo rate and reverse repo rate are crucial tools in the arsenal of central banks, used to control liquidity, inflation, and economic stability. By understanding the key differences between these rates and their practical implications, individuals and businesses can make more informed financial decisions.

For homebuyers, keeping an eye on repo rate trends can provide valuable insights into the best times to apply for home loans. Similarly, other financial products, such as personal loans, fixed deposits, and savings accounts, are also influenced by these rates. By understanding the dynamics of repo and reverse repo rates, consumers and businesses can optimize their financial strategies to maximise benefits and minimise costs.

Ready to turn your homeownership dreams into reality? With your newfound understanding of how repo rates affect home loan interest rates, you are better equipped to make informed borrowing decisions. Bajaj Finserv offers home loans up to Rs. 15 Crore* with quick approval in just 48 hours*. Check your loan offers for a home loan from Bajaj Finserv. You may already be eligible, find out by entering your mobile number and OTP.

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Frequently asked questions

What is the current repo rate?
The Repo rate, or repurchase rate, is set by each country's central bank. In India, as of now, the current repo rate is 6.50% as per Reserve Bank of India
What is the formula for the repo rate?

There is no specific formula for calculating the repo rate. It is set by the central bank based on economic conditions and monetary policy objectives. The rate is adjusted to influence liquidity and economic activity.

Why does the RBI increase the repo rate?

The RBI increases the repo rate to control inflation. Higher rates make borrowing costlier, reducing spending and demand, which helps in cooling off inflation and stabilising the economy.

What is the relationship between inflation and repo rate?

The repo rate and inflation are inversely related. Increasing the repo rate helps reduce inflation by making borrowing more expensive, which decreases consumer spending and slows down price rises.

What is the effect of the repo rate on the home loan interest rate and EMIs?

An increase in the repo rate generally leads to higher home loan interest rates and EMIs. This makes borrowing more expensive, impacting monthly payments and overall loan costs.

What is the current repo rate?

The current repo rate in India is 5.50%, as announced by Reserve Bank of India (RBI) Governor Sanjay Malhotra during the Monetary Policy Committee (MPC) meeting held on 6 June 2025. The repo rate—short for Repurchase Agreement Rate—is the interest rate at which commercial banks borrow funds from the RBI by pledging eligible securities. It is a vital tool for controlling inflation and ensuring liquidity in the banking system.

What is the repo rate and reverse repo rate today?

As of 24 June 2025, the repo rate stands at 5.50%, while the reverse repo rate is 3.35%. These rates were last revised during the RBI’s MPC meeting on 6 June 2025. The repo rate is the rate at which the RBI lends money to banks, whereas the reverse repo rate is the rate at which it borrows funds from them. Together, they form the backbone of India’s short-term monetary policy operations.

Are repo and reverse repo the same?

No, repo and reverse repo are not the same, though they are closely linked. In a repo (repurchase agreement), the central bank lends money to commercial banks in exchange for government securities, with an agreement to repurchase them later. A reverse repo is the opposite: the RBI borrows money from banks by offering them government securities.

How to calculate repo rate?

The repo rate is not derived from a fixed formula; instead, it is set by the RBI based on the country’s economic conditions. The RBI evaluates various macroeconomic indicators, including inflation, GDP growth, fiscal deficit, global trends, and liquidity in the financial system. Based on this comprehensive analysis, the Monetary Policy Committee decides whether to increase, decrease, or maintain the repo rate to achieve its dual mandate of price stability and economic growth.

What is the repo full form?

The full form of repo is Repurchase Agreement or Repurchasing Option. It refers to a financial transaction where banks borrow money from the RBI by selling securities with an agreement to repurchase them at a future date. This short-term borrowing mechanism is commonly used by central banks to manage liquidity in the system. The term is widely used in monetary policy operations, particularly when discussing how central banks control inflation and support lending.

What if the repo rate decreases?

When the repo rate decreases, it becomes cheaper for banks to borrow money from the RBI. This typically leads to a reduction in interest rates for various loans and credit products offered by banks. Lower borrowing costs can stimulate investment and spending by both businesses and consumers, helping boost economic activity. However, if used excessively, it could also lead to inflation, which is why the RBI adjusts this rate cautiously based on prevailing economic conditions.

Lower repo rates often translate to reduced home loan interest rates, making it an ideal time for homebuyers to secure financing. Bajaj Finserv leverages these favourable market conditions to offer competitive rates and flexible repayment options. Check your eligibility now. You may already be eligible, find out by entering your mobile number and OTP.

What is 50 basis points?

50 basis points (bps) means 0.50%. The term "basis point" is commonly used in finance to describe changes in interest rates or yields. One basis point equals one-hundredth of a percentage point (0.01%). So, when someone says the RBI has cut the repo rate by 50 basis points, it means the rate has been reduced by half a percentage point. This terminology provides precision when discussing small but significant rate changes.

Even small changes in basis points can significantly impact your home loan costs over the long term. That is why choosing the right lender with transparent pricing and competitive rates is crucial for your financial planning. Bajaj Finserv offers home loans with no foreclosure charges for individual borrowers on floating rates. Check your loan offers for a home loan from Bajaj Finserv. You may already be eligible, find out by entering your mobile number and OTP.

What if reverse repo rate is increased?

If the reverse repo rate is increased, it incentivises commercial banks to park more of their surplus funds with the RBI instead of lending them in the market. This leads to a reduction in the money supply, which can help control inflation and absorb excess liquidity. It’s a key monetary policy tool used by the RBI to manage short-term cash flow in the economy. A higher reverse repo rate generally tightens monetary conditions.

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