Repo vs Reverse Repo Rate: Key Differences Explained

The repo rate defines how much banks pay to borrow from the Reserve Bank of India, while the reverse repo rate defines what banks earn by depositing surplus money with the Reserve Bank of India. Both are crucial tools used by the RBI for handling inflation and liquidity. In this blog, we will understand the repo vs reverse repo rate in detail.

What is the Repo Rate?

The Repo Rate is the interest rate at which the Reserve Bank of India lends money to commercial banks using government securities as collateral. It is a monetary policy tool to control inflation and regulate liquidity. When the RBI raises the repo rate, borrowing becomes more expensive for banks. And they reducing the money supply and helping to restrain inflation.

Example of Repo Rate

For example, if a commercial bank needs funds, it borrows INR 100 crore from the Reserve Bank of India at the repo rate of 6.00% (the current repo rate of India). The bank gives government securities as collateral and agrees to repurchase them. At the end of the term, the bank pays INR 100 crore plus INR 6 crore as interest to the Reserve Bank of India.

RBI Repo Rate History

On 9th April 2025, the Reserve Bank of India announced a 25 BPS reduction in the repo rate. So this brought it down to 6.00%. This is the second cut of the year, which was foregone by a similar reduction in February. The following is the repo rate maintained by the RBI:

What is the Reverse Repo Rate?

The Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks, which is usually to drain extra interest liquidity from the banking system. This rate is involved when the Reserve Bank of India borrows money from banks during the period of extra liquidity in the market, so the banks benefit by receiving interest on their deposit.

Example of Reserve Repo Rate

For example, if a commercial bank has extra money, it can deposit INR 50,000 with the Reserve Bank of India at the reverse repo rate, say 3.00%. The RBI pays the bank INR 2500 yearly as interest for holding the money with it.

RBI Reserve Repo Rate History

At a time of a high level of inflation in the economy, the RBI increases the reverse repo. So, encouraging banks to park more funds with the Reserve Bank of India to earn higher returns on excess funds. Banks are left with fewer funds to extend loans and borrow from customers. The following is the reverse  repo rate maintained by the RBI:

Difference between Repo and Reverse Repo Rate

Here are the key differences between repo vs reverse repo rate:

Conclusion 

In conclusion, understanding the repo and reverse repo rates helps explain how the RBI influences savings, loans, and the broader economy, as these tools are crucial levers in shaping India’s economic landscape. We hope our blog on repo vs reverse repo rate has been helpful to you.

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Saniya

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