What is the Repo Rate?
The Repo Rate (short for “Repurchase Rate”) is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks for short-term needs. Banks borrow funds from the RBI by pledging government securities as collateral.
Example: If a bank faces a temporary cash shortage, it can borrow ₹1 crore from the RBI at the prevailing repo rate by providing government bonds as security.
What is the Reverse Repo Rate?
The Reverse Repo Rate is the interest rate at which the RBI borrows money from commercial banks. When banks have surplus funds, they can deposit this excess money with the RBI and earn interest at the reverse repo rate.
Example: If a bank has extra funds amounting to ₹50 lakhs, it can park this amount with the RBI and earn interest at the reverse repo rate.
Key Differences Between Repo Rate and Reverse Repo Rate
| Feature | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Definition | Rate at which RBI lends to banks | Rate at which RBI borrows from banks |
| Purpose | To inject liquidity into the banking system | To absorb excess liquidity from the banking system |
| Interest Rate Level | Higher | Lower |
| Impact on Economy | Controls inflation by regulating money supply | Manages liquidity by absorbing surplus funds |
| Collateral | Requires government securities as collateral | No collateral required |
Current Rates (as of June 25, 2025)
- Repo Rate: 5.50%
- Reverse Repo Rate: 3.35%
These rates are determined by the RBI’s Monetary Policy Committee (MPC) and are subject to change based on economic conditions.
Why Are These Rates Important?
- For Borrowers: Changes in the repo rate influence the interest rates on loans. A higher repo rate can lead to higher loan interest rates, making borrowing more expensive.
- For Savers: Adjustments in the reverse repo rate can affect the interest rates on savings and fixed deposits.
- For the Economy: These rates are tools used by the RBI to control inflation and ensure liquidity in the financial system.
Simple Analogy
- Repo Rate: Think of it as the RBI giving a loan to banks when they need money.
- Reverse Repo Rate: Imagine banks depositing their extra money with the RBI to earn some interest.
Conclusion
Understanding the repo and reverse repo rates is essential for grasping how monetary policy affects the economy. These rates influence borrowing costs, savings returns, and overall economic stability.
Note: For the most recent updates on these rates, refer to the official Reserve Bank of India website.
