What is the reverse repo rate?
The reverse repo rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks. When banks have extra money, they can:
- Lend it to the RBI for short periods
and - Earn interest at the reverse repo rate
Through this facility, the RBI absorbs excess money from banks by borrowing their surplus funds. This reduces the amount of money banks can lend to the public. It is a way for the RBI to control the total money circulating in the economy. Let’s see how:
Reverse repo rate increases |
Reverse repo rate decreases |
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What is the reverse repo rate today?
On June 6, the Reserve Bank of India’s Monetary Policy Committee (led by Governor Sanjay Malhotra) kept the “reverse repo rate” unchanged at 3.35%.
However, a sharper-than-expected cut was made in the “repo rate” by 50 basis points. It was reduced from 6% to 5.5%. This move makes borrowing cheaper for banks, which ultimately lowers loan rates for consumers and businesses.
How does the reverse repo rate work?
The RBI uses the reverse repo rate to control how much money is available in the economy. Let’s see how:
When is the reverse repo rate increased? |
When is the reverse repo rate decreased? |
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Impact of reverse repo rate on economy
The reverse repo rate influences the flow of money in the economy. Through it, the RBI tries to manage:
- Inflation
- Interest rates
- Liquidity
- Investment activity
- Exchange rate
Let’s understand how it impacts different parts of the economy:
1. Control of inflation
When the RBI increases the reverse repo rate, banks earn more by keeping their money with the RBI. So, they reduce lending to individuals and businesses.
When fewer loans are given, people have less money to spend, which reduces demand for goods and services. A lower demand reduces inflation, as there is less pressure on prices to increase.
2. Influence on interest rates
The reverse repo rate acts as a base for setting other short-term interest rates in the economy. If it rises, banks raise their own interest rates for loans.
This makes borrowing costlier for individuals and businesses.
3. Bank liquidity management
Liquidity means how much “ready cash” banks have to lend. If the reverse repo rate is high, banks prefer to keep extra money with the RBI.
This removes excess cash from the banking system. On the contrary, if the rate is low, banks lend more. This increases liquidity.
4. Encouragement for investment
A lower reverse repo rate discourages banks from parking money with the RBI. Instead, they give out more loans to businesses and consumers. This leads to:
- Higher investment
and - Spending in the economy
5. Exchange rate effects
Foreign investors look at interest rates before investing. A higher reverse repo rate usually attracts foreign capital. This increases the demand for the Indian rupee and raises its value (appreciation).
In contrast, if the rate is lowered, foreign investors prefer investing elsewhere. This weakens the rupee (devaluation).
Impact of reverse repo rate today on loans
The reverse repo rate influences the pool of money available with banks for lending.
This impacts the interest rates on different types of loans, including personal loans.
Let’s see how:
- When the RBI increases the reverse repo rate, banks find it more profitable to deposit their extra money with the RBI instead of lending. This reduces the amount of money available for borrowers.
- With less money available to lend, banks raise their loan interest rates. This makes loans (like personal loans, home loans, or business loans) more expensive for borrowers.
- As interest rates rise, borrowers who take new loans have to pay higher EMIs. This increases the overall cost of borrowing.
- When loan interest rates go up, some individuals and businesses usually delay or avoid taking loans. This reduces the demand for credit in the economy.
Importance of reverse repo rate in monetary policy
The RBI uses the reverse repo rate as a monetary policy tool to manage the country’s money supply. Through it, the RBI controls:
- Inflation
- Liquidity
- Interest rates
Let us understand how:
1. Liquidity management
By changing the reverse repo rate, the RBI controls how much money banks retain for lending purposes. Usually,
- A higher rate encourages banks to park more funds with the RBI.
- This reduces the money circulation in the market.
- On the other hand, a lower rate encourages banks to increase lending.
- This move has the opposite effect and increases liquidity.
2. Inflation control
When inflation is high, the RBI raises the reverse repo rate to reduce excess money in the economy. With less money available, people spend less, which helps in curbing price increases.
3. Financial stability
A balanced reverse repo rate gives banks a safe option to deposit surplus funds. This lowers the chances of banks giving risky loans just to use up extra cash.
4. Interest rate management
Changes in the reverse repo rate indirectly influence other interest rates in the economy. In response, banks usually adjust their deposit and loan rates accordingly. This affects:
- How much do people earn from their savings
and - How much do they pay on loans
Recent trends and changes in current reverse repo rate
The RBI changes the reverse repo rate from time to time, depending on the country’s economic needs. Through this rate, the RBI manages the flow of money in the economy by encouraging or discouraging banks from keeping money with the central bank.
For example:
- During the COVID-19 pandemic, the economy was facing a slowdown.
- To support recovery, the RBI lowered the reverse repo rate.
- This step made it less attractive for banks to keep money with the RBI.
- Instead, they were encouraged to lend more to individuals and businesses.
- More lending led to more spending and investment.
- As a result, this move revived the economic activity.
In contrast, when inflation is high, the RBI increases the reverse repo rate. This makes it more rewarding for banks to park their extra funds with the RBI. As a result, banks reduce lending to the public. This lowers the amount of money in circulation.
With less money being spent:
- The demand for goods falls
and - The prices decrease
As of June 17, 2025, the RBI decided to keep the reverse repo rate steady at 3.35%. This shows that the RBI is trying to maintain a balance between:
- Supporting economic growth
and - Keeping inflation under control
Key takeaways
- The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks.
- When the reverse repo rate is high, banks prefer to keep their extra money with the RBI. This reduces the amount of money available for loans to the public.
- When the reverse repo rate is low, banks lend more to individuals and businesses.
- A higher reverse repo rate lowers the money supply in the economy. In contrast, a lower rate increases it by promoting lending.
- Changes in the reverse repo rate affect interest rates on savings accounts, fixed deposits, and loans. Usually, this influences borrowing and saving behaviour.
- By being aware of the reverse repo rate, individuals can smartly decide the right time to take a loan or make an investment.
Conclusion
The reverse repo rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks. The RBI uses it as a monetary policy tool to manage the money supply in the economy. Additionally, it is used to control inflation, liquidity, and influence interest rates.
By increasing or decreasing the reverse repo rate, the RBI can either:
- Absorb extra money from the banking system
or - Release more money into it
In this way, the RBI tries to maintain a balance in the economy (particularly during periods of inflation or slowdown).
By understanding the reverse repo rate and the repo rate, you can make better financial decisions related to borrowing, saving, or investing.
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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.
As of June 17, 2025, the reverse repo rate in India is 3.35%. This is the rate at which the RBI borrows money from banks. Over time, this rate has changed depending on economic needs. It was once as high as 13.50% in 2000 and as low as 3.25% in 2009.
When the RBI increases the reverse repo rate, banks find it more profitable to keep their extra money with the RBI. So, they lend less to people and businesses.
This contractionary move reduces the amount of money circulating in the market. Due to the availability of fewer loans, people spend less, which reduces demand. Such a lower demand, in turn, reduces inflation.
When the RBI lowers the reverse repo rate, banks earn less by parking money with the RBI. So, instead of depositing their funds with the RBI, they prefer to lend more to customers.
This expansionary move:
- Increases the money available in the market
- Leads to more spending
- Promotes investment in the economy
- Stimulates economic growth
Yes, the reverse repo rate matters to investors because it indirectly influences interest rates on loans and deposits. Let’s see how:
- When the reverse repo rate is increased, banks usually increase loan interest rates. At the same time, to attract deposits, banks raise deposit interest rates.
- When the reverse repo rate is lowered, banks reduce loan interest rates. There is also a fall in the deposit rates as banks don’t need to attract investors. There is sufficient availability of ready cash for lending.
Additionally, such changes also impact stock and bond markets. For example, say the RBI increases the reverse repo rate. Now, borrowing becomes expensive, and businesses may slow down. This affects stock prices and investor returns.
So, changes in the reverse repo rate are relevant for investors looking at bonds, fixed deposits, stocks, or other financial products.
The RBI raises the reverse repo rate when it wants to:
- Absorb the excess liquidity
and - Reduce the amount of money circulating in the economy
This allows the RBI to control inflation. Let’s see how:
- Usually, when the reverse repo rate goes up, banks keep more money with the RBI instead of lending it out.
- With fewer loans given, people spend less.
- This reduces demand and brings prices down.
The RBI uses the reverse repo rate to manage:
- Inflation
- Money supply
- Interest rates
It is part of the RBI’s monetary policy tools. By raising this rate, the RBI can reduce the pool of money that banks can lend to people. This tactic lowers spending and also inflation.
In comparison, when the rate is lowered, banks lend more. This move supports business activity and stimulates economic growth. Also, it keeps the economy stable under different conditions.
If the RBI increases the reverse repo rate, banks will prefer to keep money with the RBI rather than give loans. Due to this, the circulation of money in the market decreases.
Consequently:
- Loans become more expensive
and - Borrowing goes down
People and businesses spend less, which reduces inflation. However, it can also slow down economic growth if lending remains low for too long.
