What is Reverse Repo Rate: Meaning, How Will It Impact You?

The reverse repo rate refers to the rate at which commercial banks within a country borrow money from the central bank. Controlling the money supply in an economy can be achieved using this monetary policy instrument.

An upsurge in the reverse repo rate means that the central bank is borrowing money from banks at a higher rate. This decreases the money supply in the economy.

In contrast, a decrease indicates that the central bank borrows money from banks at a higher rate. As a result, the money supply in the economy increases.

Historical Timeline and Changes of the Reverse Repo Rate

The RBI Reverse Repo Rate history table list the historical changes:

The Current Reverse Repo Rate

As of October 2022, the current reverse repo rate is 3.35%. The RBI uses it to control the money supply in the economy. When the RBI increases the reverse repo rate, it becomes more expensive for banks to borrow money from the RBI. This leads to a decrease in the economy’s money supply and helps control inflation. 

Economic Impact of the Reverse Repo Rate

When the Reserve Bank of India (RBI) decides to increase the rates, it essentially means that commercial banks will have to park more of their excess funds with the central bank. This results in less money being available for lending and, consequently, a rise in interest rates. This, in turn, leads to slow economic activity, as people are now less likely to borrow for big-ticket items such as homes and cars. The RBI usually resorts to this measure when it wants to rein in inflationary pressures.

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How Does Reverse Repo Rate Work?

The Reserve Bank of India’s Monetary Policy Committee (MPC) uses the reverse repo rate as one tool to control the country’s money supply. It is calculated based on the weighted average of the rates at which it borrows funds from select commercial banks. The rates at which RBI borrows funds from banks are usually lower than the repo rate. 

When the RBI wants to make it more expensive for banks to borrow money, it increases the reverse repo rate. This makes it more expensive for banks to borrow money from the RBI. As a result, banks are more likely to lend money to each other at higher rates. This increases borrowing costs for companies and consumers and slows economic growth.

A Brief Difference Between Repo Rate and Reverse Repo Rate

The main difference between repo rate and reverse repo rate is that the repo rate is the rate at which the RBI provides liquidity to commercial banks. In contrast, the reverse repo rate is the rate at which commercial banks extend credit to the RBI.

The central bank uses the repo rate to control inflation. A higher repo rate means that commercial banks will have to pay a higher interest rate on loans from the central bank, which will, in turn, discourage them from lending money. On the other hand, a lower repo rate will encourage commercial banks to lend money.

The central bank uses the reverse repo rate to control the money supply. A higher reverse repo rate means that commercial banks will earn a higher interest rate on their deposits with the central bank, encouraging them to keep more money in reserve. On the other hand, a lower reverse repo rate will encourage commercial banks to lend money.

FAQ’s about Reverse Repo Rate