Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy.
Key Differences between Repo Rate and Reverse Repo Rate
- The significant difference between the Repo Rate and Reverse Repo Rate is that Repo Rate is the interest rate at which the commercial banks borrow loans from RBI, while Reverse Repo Rate is the rate at which the RBI borrows loan from the commercial banks.
- The Repo Rate is always higher than the Reverse Repo Rate.
- The Repo rate is a monetary tool used by the central bank for controlling the Inflation whereas a central bank uses reverse Repo Rate for controlling the supply of money in the economy.
- The aim of Repo rate is to fulfil the deficiency of funds. On the other hand, the objective of Reverse Repo Rate is to ensure the liquidity in the economy.
- Repo Rate is charged on Repurchase Agreement, whereas the Reverse Repo Rate is charged on Reverse Repurchase Agreement.
- Both are prescribed by the Reserve Bank of India.
- Both are bank policy rates.
- Both affects the liquidity of the economy.
Repo Rate and Reverse Repo Rate is that, with an increase in the Repo rate the borrowings of the commercial banks from RBI becomes dearer and as the result, fewer funds are borrowed.
Whereas, with an increase in the Reverse Repo Rate the RBI borrows money from commercial banks at a much higher rate, with the intention to regulate the supply of money in the economy.