Current Reverse Repo Rate (2024)
Reverse repo rate is the interest rate used by the Reserve Bank of India (RBI) to borrow money from other commercial banks. It is a financial instrument used to control the money flow in India’s market. A higher rate offers more incentive to commercial lenders to park their finances with RBI, decreasing the number of funds available in the market and vice versa.
Reverse Repo example
For instance, consider a scenario where the annual reverse repo rate stands at 6%. In this case, if a commercial bank deposited Rs. 20,000 in the central bank, it will accrue Rs. 1,200 in annual interest.
Impact of reverse repo rate on economy
The reverse rate has a direct impact on the cost of borrowing; a higher reverse repo rate can decrease the funds used to extend loans directly affecting the spending power of the nation’s populace. It is among the primary tool used by the RBI to keep the currency flow in check and to stabilize prices in the open market. The reverse rate usually changes along with the repo rate by an equal percentage and in the same direction.
However, unlike the repo rate, where a change influences the interest rates of financial products like a home loan, there are different effects experienced when the reverse repo rate changes. While it doesn’t lead to a reduction or increase in the home loan interest rate, it does affect consumer demand as well as the advances from financial institutions throughout the nation.
Current Reverse Repo Rate
The current reverse repo rate as of now in 2024 is 3.35% which is unchanged from the last time updated in April 2020.
What is the new repo rate and reverse repo rate?
Types of RBI Rate |
Rate Percentage |
Repo Rate |
6.50% |
Reverse Repo Rate |
3.35% |
Marginal Standing Facility Rate |
6.75% |
Difference between repo rate and reverse repo rate
Here is the difference between repo rate and reverse repo rate presented in a table format:
Aspect |
Repo Rate |
Reverse Repo Rate |
Definition |
The rate at which the central bank lends money to commercial banks. |
The rate at which the central bank borrows money from commercial banks. |
Purpose |
Used by the central bank to control inflation and stimulate economic activity. |
Used by the central bank to manage excess liquidity in the banking system. |
Borrower |
Commercial banks borrow from the central bank. |
Commercial banks lend to the central bank. |
Interest Earned |
Central bank earns interest on the loans it provides. |
Commercial banks earn interest on the funds they lend to the central bank. |
Impact on Economy |
Decreasing repo rate encourages borrowing, spending, and economic growth. |
Increasing reverse repo rate incentivizes commercial banks to park excess funds with the central bank, reducing money circulation in the economy. |
Rate Differential |
Generally higher than the reverse repo rate. |
Generally lower than the repo rate. |
Liquidity Management |
A tool for managing money supply in the economy. |
A tool for absorbing excess liquidity from the banking system. |
Monetary Policy Tool |
A part of expansionary and contractionary monetary policies. |
Primarily used in contractionary monetary policy to control excessive money supply. |
Economic Indicators |
Often seen as a signal of the central bank's stance on monetary policy. |
Used to gauge liquidity conditions in the financial system. |
Inflation Control |
Lowering repo rate can lead to increased money supply and potential inflation. |
Increasing reverse repo rate helps in controlling inflation by reducing money supply. |
Bajaj Finserv – Key Financial Terms & Concepts
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Frequently asked questions
The reverse repo rate is determined by the Reserve Bank of India (RBI). It is a tool used by the central bank to regulate the money supply and control inflation in the economy. The central bank's Monetary Policy Committee (MPC) meets periodically to review economic conditions and set the reverse repo rate, taking into consideration various factors such as inflation, economic growth, and financial stability. By adjusting the reverse repo rate, the central bank can influence the borrowing and lending activities of commercial banks and impact overall economic conditions.
The reverse repo rate changes primarily to achieve the central bank's monetary policy objectives. It can increase to control inflation, slow down economic growth, manage liquidity, respond to global economic conditions, meet monetary policy goals, influence exchange rates, and adapt to overall economic conditions. Central banks carefully analyze these factors before adjusting the reverse repo rate.
