Repo Rate and Reverse Repo Rate are the most used words in the Banking Sector.These two are the monetary policy rates of the country which are determined by the central Bank to control the inflation and money supply in the country. The Central bank of the country is apex institution which is authorized to alter and monitor the rates of Repo Rate and Reverse Repo Rate.
REPO RATE
Repo Rate is the short form of the term “Repurchase Rate”. Repo Rate is the rate at which the Reserve Bank Of India (RBI) lends money for short-term purposes to the banks in the country. Whenever the banks face the shortage of funds they borrow money for certain rate of interest called “Repo Rate” from RBI. Repo Rate acts as a tool to decide the liquidity rate in the banking system and control of inflation.
RBI controls the liquidity rate in the banking system with the help of Repo Rate. RBI decreases Repo Rate if it wants to increase the liquidity thereby encouraging the banks to borrow more from the RBI. RBI increases the Repo Rate if it wants to decrease the liquidity rate thereby discouraging the banks to borrow money from RBI.
REVERSE REPO RATE
Reverse Repo Rate is the short form of the term “Reverse Repurchase Rate”. It is the exactly opposite to Rate Rate. Reverse Repo Rate is the rate at which the RBI borrows money from the banks in the country. Banks park their excess money with RBI to gain certain rate of interest called as Reverse Repo Rate.
RBI uses “Reverse Repo Rate” as a tool to control the money floating in the banking system. RBI increases “Reverse Repo Rate” to limit the money flow by increasing the interest rate i.e banks are attracted to deposit their money with RBI if RBI gives more interest this will result in the decrease of money flow in the system and increase of money with RBI. RBI decreases the “Reverse Repo Rate” banks usually withdraw their money from RBI and lend it to their customers to get more returns.
COMPARISON CHART
| REPO RATE | REVERSE REPO RATE |
|---|---|
| Repo Rate is the rate at which the central bank lends money for short-term purposes to the banks in the country. | Reverse Repo Rate is the rate at which the central bank borrows money from the banks in the country. |
| Rate of Interest | |
| The Repo rate always stays higher than the Reverse Repo Rate. | The Reverse Repo Rate does not exceed Repo Rate in any case. |
| Impact | |
| Increase in Repo Rate negatively impact banks, because they have to pay high-interest rates to the central bank. | Increase in Reverse Repo Rate positively impact the banks, because they receive more interest from the central bank. |
| Action | |
| Repo Rate acts as a monetary tool to decide the liquidity rate in the banking system and control of inflation. | Reverse Repo Rate acts a tool to control the money flow and supply in the economy. |
| Security | |
| Repo rate involves selling government securities by banks to central bank with an agreement to repurchase the securities by paying a prescribed interest after a certain period of time. | Reverse Repo Rate involves the borrowing of money by the central bank from the banks by offering high-interest rates to banks. |
| Charged On | |
| Repo rate is the interest rate which is charged on Repurchase agreement. | Reverse Repo Rate is the interest rate which is charged on Reverse Repurchase agreement. |
CONCLUSION
Repo Rate and Reverse Repo Rate are the rates of interests which central bank uses only for short-term funds (i.e from 2 days to 90 days). Repo Rate and Reverse Repo Rate are the two important policy rates which are used by the central bank in every country to control and regulate the inflation and money supply in the economy.
