What is Repo Rate and Reverse Repo? Meaning and Differences

Introduction

Repo Rate and Reverse Repo Rate are two essential tools used by the Reserve Bank of India (RBI) to control liquidity and manage inflation in the economy. They play a significant role in influencing interest rates, bank lending, and monetary policy in India. The Repo Rate is the rate at which the RBI lends money to commercial banks, while the Reverse Repo Rate is the rate at which commercial banks lend to the RBI. Understanding the relationship between these rates is crucial for individuals, businesses, and investors alike. This guide explains the Repo Rate and Reverse Repo Rate, their workings, and the differences between them.

What is Repo Rate?

The Repo Rate (short for Repurchase Rate) is the interest rate at which the Reserve Bank of India (RBI) lends short-term money to commercial banks, typically against government securities or bonds. This rate is a crucial monetary policy tool used by the RBI to regulate inflation and control the flow of money in the economy.

Key points:

1. Purpose: The repo rate is used by the RBI to control inflation by regulating the money supply in the economy.

2. How it works: When commercial banks need money, they borrow from the RBI at the repo rate, offering securities as collateral. The rate determines the cost of borrowing.

3. Impact: A higher repo rate increases the cost of borrowing, leading to lower consumer and business spending, which helps to control inflation.

4. Influence on Bank Lending Rates: Changes in the repo rate often result in adjustments in bank lending rates (EMIs, loans) for individuals and businesses.

How Does Repo Rate Work?

When commercial banks need to meet their short-term liquidity requirements, they borrow money from the Reserve Bank of India by offering securities or bonds as collateral. The interest rate at which this borrowing happens is known as the Repo Rate.

Working Process:

1. Borrowing from RBI: Banks facing a shortage of funds can pledge government securities to the RBI in exchange for short-term loans at the repo rate.

2. Collateral: The bank offers securities as collateral for the loan. Once the loan is repaid, the bank takes back the securities.

3. Effect on Inflation: The RBI uses repo rate changes to control inflation. Increasing the repo rate can decrease inflation by reducing money flow in the market.

4. Market Impact: Changes in the repo rate also impact bank interest rates, affecting everything from home loans to car loans

Current Repo Rate in India

The Repo Rate is not fixed forever; the RBI reviews and adjusts it regularly, usually once every two months, in a meeting called the Monetary Policy Committee (MPC). This committee keeps a close watch on the country's economic health, especially inflation and economic growth, before making any changes.

For the Financial Year 2025-26, the RBI has made adjustments to the rate. As of the latest announcements (around mid-2025), the current Repo Rate in India is 5.50%. This rate is a snapshot in time and can change based on the RBI’s decision in its next meeting. This particular rate setting is a move by the RBI to find a balance—to ensure that credit remains affordable enough to support economic activities while still keeping a check on price stability and inflation. Any change from this 5.50% figure in the future will immediately make headlines because of its big impact on the cost of loans for every Indian.

Reserve Bank of India Repo Rate

The RBI's Repo Rate history shows how the central bank responds to changing economic conditions, whether it's a boom, a slowdown, or high inflation. The table below shows the movement of the official Repo Rate over a recent period.

Date Effective From

Repo Rate (%)

Key Action / Reason

August 6, 2025

5.50%

Cut by 50 bps, likely to support economic growth and keep credit affordable.(Hypothetical for FY 2025-26)

June 6, 2025

6.00%

Cut by 25 bps, continuing to ease rates.

February 7, 2025

6.25%

Cut by 25 bps, signaling a start to rate reduction cycle.

December 6, 2024

6.50%

Unchanged, maintaining a pause after previous hikes to control inflation.

April 6, 2023

6.50%

Unchanged, after a series of hikes to curb high inflation.

What is Affected by a Change in Repo Rate?

A change in the repo rate influences several areas of the economy:

1. Interest Rates on Loans: A higher repo rate results in higher interest rates on loans, such as home loans and personal loans. Conversely, a lower repo rate makes loans cheaper.

2. Inflation Control: The repo rate helps control inflation by reducing the money supply. Higher repo rates reduce demand, thus lowering inflation.

3. Bank Lending Rates: Banks use the repo rate as a benchmark to set their lending rates. A higher repo rate means higher lending rates.

4. Investment: Investors may reduce their investments in stocks and increase investments in fixed-income assets like bonds due to changing interest rates.

Liquidity, they can park their funds with the RBI, earning interest at the reverse repo rate.

Key Points:

1. Purpose: Reverse repo is used to drain excess liquidity from the system and control inflation.

2. Current Reverse Repo Rate: As of FY 2025-26, the reverse repo rate is set at 3.35% by the RBI.

3. Impact: A higher reverse repo rate makes it attractive for banks to park funds with the RBI, thus reducing money circulation

Difference Between Repo Rate and Reverse Repo Rate

While both are crucial interest rates set by the RBI, their roles are opposite. Here are the key differences:

Feature

Repo Rate (Repurchase Agreement Rate)

Reverse Repo Rate (Reverse Repurchase Agreement Rate)

Direction of Money Flow

Money flows from RBI to Commercial Banks.

Money flows from Commercial Banks to RBI.

Who is the Borrower?

Commercial Banks

RBI (Central Bank)

Who is the Lender?

RBI (Central Bank)

Commercial Banks

Primary Objective

To inject (add) money into the banking system (to encourage lending and growth).

To absorb (pull out) extra money from the banking system (to control inflation).

Rate Structure

It is generally Higher (Currently 5.50%).

It is generally Lower (Currently 3.35%)

Why Both Rates Are Important Together?

Both repo rate and reverse repo rate work together to maintain a balance in the economy:

1. Liquidity Management: While the repo rate adds liquidity to the market, the reverse repo rate removes excess liquidity.

2. Inflation Control: Both rates help the RBI control inflation by regulating money supply in the economy.

3. Monetary Policy: The RBI uses these rates to create a monetary policy that helps stabilize prices, encourage investment, and prevent overheating of the economy.

Conclusion

The Repo Rate and Reverse Repo Rate are essential tools used by the Reserve Bank of India (RBI) to manage the country's monetary policy. These rates influence interest rates, investment decisions, and the overall economy. Understanding how they work helps individuals, businesses, and investors stay informed about economic changes. For FY 2025-26, the repo rate is set at 4.00%, and the reverse repo rate at 3.35%, creating a balanced system for managing inflation and liquidity.