Reverse repo rate is a policy 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.
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.