What is Reverse Repo Rate?
Difference Between Repo Rate Vs
Reverse Repo Rate
https://www.bajajfinserv.in/insights/what-is-reverse-repo-rate
23321 2 min read
05 Jan 2021
When it comes to borrowing via financial instruments such as retail loans, it is crucial to
know the factors that affect the loan cost. With any financial instrument, several factors such
as the interest rate, tenor, and fees are usually well-known, but there are those that remain
unnoticed. Among these is the reverse repo rate, and it is a significant number that can help
borrowers who want to save on interest. But what is reverse repo rate, and is there a
difference between repo rate and reverse repo rate?
Like the repo rate, a reverse repo rate is a tool used by the reserve bank of India to inject
funds and maintain liquidity in the economy. The importance of the repo rate and reverse
repo rate extends to loans, investments and their yield. There are significant differences
between repo and reverse repo rates, although they do serve a similar purpose, that is, to
ensure economic stability.
Every year these rates are revised, and this is why you must be aware of repo rates and
reverse repo rates as soon as they are announced. Comparing repo rate vs reverse repo rate
is an excellent way to learn all about these tools. To help you do just that, here’s a breakdown
of repo vs reverse repo.
Additional Read: Why frequent flyers should pick a flexi interest-only loan?
What is the reverse repo rate?
Contrary to the repo rate, the reverse repo rate is RBI’s interest rate from commercial banks
when needed. Here, banks deposit surplus funds with the RBI at a favourable rate and earn
interest on it. The RBI injects liquidity into the economy and increases purchasing power
when it lowers the reverse repo rate.
It is important to note that the key difference between repo and reverse repo rate is that the
repo rate will always be higher in comparison. A higher reverse repo rate would encourage
banks to store funds with the RBI rather than make them available for lending. The
difference between the repo rate and the reverse repo rate is indicative of the RBI’s income.
Additional Read: What is repo rate, and how does repo rate impact the personal loan?
What is a repo rate?
The repo rate is the interest rate that the Reserve Bank of India (RBI) imposes on loans that
commercial banks avail from the RBI against government securities like treasury bills. Repo,
which stands for repurchasing agreement or repurchasing option, is a repurchasing
agreement that both the RBI and the bank agree to, stating the repurchase of said securities
on a given date and at a determined price. Using the repo rate, the central bank can establish
control over inflation in the country.
Additional Read: Factors that affect your loan interest rate
What are the key points that determine the difference between repo rate
and reverse repo rate?
As mentioned, the reverse repo rate is never higher than the repo rate. Currently, there is a
0.65% difference between the two. For a more detailed breakdown of the differences,
consider this table.
Reverse repo rate Repo rate
Commercial banks deposit excess Commercial banks provide securities to the
funds with the RBI and earn RBI to get funds and repurchase securities
interest at a pre-determined rate and time
Increase in rate results in lower Increase in rate results in a high cost of
liquidity in the economy as banks funds, which makes loans costlier
invest with the RBI
Decrease in rate results in a lower cost of
Decrease in rate results in higher funds, which supports lending
liquidity in the economy
Charged on the repurchasing agreement
Charged on the reverse
Helps the RBI control inflation
repurchasing agreement
Helps the RBI control money
supply
What is the repo rate and reverse repo rate currently?
The current repo rate is 4.40% as of 4th May 2022, while the reverse repo rate remains
unchanged is 3.35%.
Additional Read: What is compound interest and simple interest: How to calculate it
Understanding what repo and reverse repo is, is the first step and keeping updated about
them is the next. Whether you’re investing or you’re in the market for a loan, financial
reforms from the RBI regarding these rates should be on your radar. The importance of repo
and reverse repo rate is particularly apparent in a high rate regime when the cost of
borrowing across the market is expensive. However, even in an unfavourable economic
climate, you should still take the time to scout for an offering that truly complements your
finances.
The Bajaj Finserv Personal Loan is one such offering that you should consider. With it, you
get access to a high-value sanction and flexible repayment plans on attractive, pocket-friendly
terms. You can get up to Rs. 25 lakh at a competitive interest rate and a tenor that ranges up
to 60 months. With this offering, loan processing is a breeze due to its minimal requirement
for documentation and the relaxed eligibility criteria. Further, you also enjoy provisions like
online loan applications, instant approval, and same-day disbursal! For all these benefits and
more, check your pre-approved offer today and borrow without any hassles.
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