Reverse repo rate and repo rate set by the Reserve Bank of India (RBI) are key monetary policy tools used to manage the country’s economy. These rates are influenced by factors such as inflation, currency movements and liquidity in the banking system. Understanding how they work helps explain changes in lending costs, savings returns and overall economic activity.
Below is a clear summary of what repo and reverse repo rates mean, their current levels, and how they affect borrowers, banks and the broader economy.
Current Repo Rates
As of the latest RBI communication, the repo rate in India stands at 6.50%, a level that has remained unchanged since the announcement in August 2024. This follows the earlier change in February 2023 when the rate was set at 6.25%.
Reserve Bank of India Rates
The key policy rates published by the RBI are:
| Repo Rate Today | 6.50% |
| Reverse Repo Rate | 3.35% |
| Bank Rate | 6.75% |
| Marginal Standing Facility Rate | 6.75% |
Disclaimer: These rates are noted as current at the time of writing in December 2024. Policy rates are subject to change, so consult the latest RBI announcements for up-to-date figures.
What is the Repo Rate?
The term “repo” refers to a repurchase agreement: commercial banks borrow funds from the RBI by selling securities to the RBI with an agreement to repurchase them later. The repo rate is the interest rate charged by the RBI on such short-term loans. Banks use the repo facility to manage short-term liquidity or to navigate volatile market conditions.
Impact of Repo Rate Changes on Borrowers
Changes in the repo rate flow through to bank lending rates. When the RBI raises the repo rate, borrowing from the RBI becomes costlier for banks. Banks typically pass on that higher cost to customers in the form of increased loan interest rates, making loans more expensive. Conversely, when the repo rate is lowered, banks can offer cheaper loans.
Relationship Between Repo Rate and Inflation
The repo rate is a primary tool the RBI uses to control inflation and stabilize the economy. By raising the repo rate, the RBI reduces the money supply and increases borrowing costs, which can curb consumer spending and investment and thereby ease inflationary pressure. Lowering the repo rate has the opposite effect, encouraging lending, spending and investment when inflation is low or growth needs support.
What is the Reverse Repo Rate?
The reverse repo rate is the rate at which the RBI borrows funds from commercial banks. It is a mechanism for the central bank to absorb excess liquidity from the banking system. When the RBI raises the reverse repo rate, banks find it more attractive to park surplus funds with the RBI, which reduces the amount of money available for lending and helps mop up liquidity.
Currently, the reverse repo rate is 3.35%. Typically, the reverse repo rate is set below the repo rate to preserve the RBI’s role as lender of last resort while offering banks a secure option for short-term parking of funds.
Difference Between Reverse Repo Rate and Repo Rate
The following table outlines the primary differences between the two rates:
| Parameter | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Lender and Borrower | The RBI lends money to commercial banks | The RBI borrows money from commercial banks |
| Operational Mechanism | Banks sell securities to the RBI with an agreement to repurchase them later | Banks deposit surplus funds with the RBI and earn interest |
| Objective | Support liquidity and influence borrowing costs | Absorb excess liquidity and control money supply |
| Impact of Rate Hike | Discourages banks from borrowing; typically raises lending rates | Makes parking funds with the RBI more attractive, reducing money available for lending |
| Impact of Rate Cut | Encourages borrowing and lowers lending rates | Banks withdraw deposits from the RBI and lend more to the public |
Both rates influence the availability and cost of credit. An increase in the repo rate can push up loan interest, while a higher reverse repo rate can reduce liquidity and constrain lending. To prepare for periods of tighter credit, households and businesses are advised to maintain emergency savings and consider liquid investments such as short-term deposits or liquid mutual funds.
FAQs on Repo and Reverse Repo Rate
What are the current repo and reverse repo rates?
The repo rate is 6.50% and the reverse repo rate is 3.35% as of the latest published figures in December 2024. These rates can change with subsequent RBI policy decisions.
Who sets the reverse repo rate?
The Reserve Bank of India sets the reverse repo rate as part of its monetary policy toolkit to manage liquidity and control inflation.
Can you give a simple example of the repo rate?
If the repo rate is 6.50% and a bank borrows ₹100,000 from the RBI under a repurchase agreement, the annualized interest cost would be ₹6,500 at that rate (simplified for illustrative purposes).
Is the repo rate good or bad?
The repo rate is neither inherently good nor bad; it is an essential policy tool. Raising it can reduce inflation but increase borrowing costs, while lowering it can stimulate borrowing and growth but may raise inflationary risks if used excessively.
Is the reverse repo rate fixed?
No. The reverse repo rate is a policy rate set by the RBI and is adjusted as needed. It is currently 3.35% and may be revised by the RBI in future policy reviews.