DIFFERENCE BETWEEN REPO RATE AND REVERSE REPO RATE

REPO RATE

The repo rate is the rate the RBI levies when commercial banks borrow funds from it. Usually, commercial banks borrow money from the RBI by using government securities like treasury bills and bonds as collateral. Thus, the repo rate is the lending rate charged by the RBI.

Essentially, the word ‘repo’ stands for repurchasing agreement/option. It is an agreement wherein both the RBI and the bank agree to repurchase securities at a predetermined price and date. The RBI relies on the repo rate to control inflation in the economy of the country.

REVERSE REPO RATE

Reverse repo as the name suggests is the opposite contract to the Repo Rate. The reverse Repo rate is the rate at which the Reserve Bank of India borrows funds from commercial banks in the country. In other words, it is the rate at which commercial banks in India park their excess money with the Reserve Bank of India usually for a short term. The current Reverse Repo Rate as of February 2020 is 4.90%.

Also,, the reverse repo rate is RBI’s interest rate from commercial banks when needed. Here, banks deposit surplus funds with the RBI at a favorable 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 rates 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.

Sr. No	Repo Rate	Reverse Repo Rate
1.	Applied on the interest payable when commercial banks borrow from the RBI in exchange for securities at a predetermined rate and time.	The rate at which commercial banks earn interest when they park surplus funds with the RBI.
2.	It is used to control inflation and deficiency of funds	It is used to manage cash-flow
3.	It involves the sale of securities that would be repurchased in the future.	It involves the transfer of money from one account to another.
4.	Helps the RBI control inflation.	Helps the RBI control the supply of money.
5.	Decrease in rate results in a lower cost of funds, which supports lending	Decrease in rate results in higher liquidity in the economy
6.	Commercial banks get funds from RBI using government bonds as collateral.	Commercial banks deposit their excess funds with RBI and receive interest from the deposit.
7.	To manage short-term deficiency of funds	To reduce overall supply of money in the economy

 

To conclude, the difference between these two is that an increase in the repo rate will make commercial banks borrow less. Whereas an increase in the reverse repo rate will allow commercial banks to transfer more funds to RBI, which contributes to the money supply.