We are not only the ones who need funds to fulfil our requirements, but the bank too, which is the supplier of money needs funds in case of shortage of its financial resources. And even sometimes the ‘Banker’s Bank’ i.e. the central bank also needs funds to maintain the liquidity in the economy.
In this regard, have you heard about the two entities Repo Rate and Reverse Repo Rate? If yes, then what does it mean? Are they both same or different? Let’s understand the meaning, after that, it would be easy for us to understand the difference between the Repo Rate and Reverse Repo Rate.
Content: Repo rate Vs Reverse repo rate
|Basis for Comparison||Repo Rate||Reverse Repo Rate|
|Meaning||Repo rate is the rate at which the Central bank of India grants loan to the commercial banks for a short period against government securities.||Reverse repo rate is the rate at which the commercial banks grant loan to the Central Bank of India.|
|Purpose||To fulfill the deficiency of funds.||To ensure liquidity in the economy.|
|Controls||Inflation||Money supply in the economy.|
|Charged on||Repurchase Agreement||Reverse Repurchase Agreement|
Definition of Repo Rate
Repurchase Option or a Repo rate is the rate at which the Reserve Bank of India (RBI) grants the loan to the commercial banks against government securities. It is charged on Repurchase Agreement i.e. an agreement between two parties in which one party sells its securities to another promising that the securities would be bought back over a specified period.
For controlling the inflation, RBI uses this tool whereby the rate is increased to reduce the commercial bank’s borrowings, which in return pulls down the inflation.
Definition of Reverse Repo Rate
Reverse repo rate is exactly opposite to a Repo rate; it is an interest rate at which the commercial bank grants the loan to the Central Bank of India i.e. RBI. The Reverse repo rate is always lower than a repo rate.
This is a monetary tool used by RBI to control the money supply in the country, i.e. with the increase in the rate, the flow of money in the economy decreases as the banks will now invest its money with RBI due to safety and lucrative interest rates.
Key Differences Between Repo Rate and Reverse Repo Rate
- The significant difference between the Repo Rate and Reverse Repo Rate is that Repo Rate is the interest rate at which the commercial banks borrow loans from RBI, while Reverse Repo Rate is the rate at which the RBI borrows loan from the commercial banks.
- The Repo Rate is always higher than the Reverse Repo Rate.
- The Repo rate is a monetary tool used by the central bank for controlling the Inflation whereas a central bank uses reverse Repo Rate for controlling the supply of money in the economy.
- The aim of Repo rate is to fulfil the deficiency of funds. On the other hand, the objective of Reverse Repo Rate is to ensure the liquidity in the economy.
- Repo Rate is charged on Repurchase Agreement, whereas the Reverse Repo Rate is charged on Reverse Repurchase Agreement.
- Both are prescribed by the Reserve Bank of India.
- Both are bank policy rates.
- Both affects the liquidity of the economy.
After a brief discussion on these two terms, we came to the conclusion that the two entities are opposite from each other. The significant difference between the Repo Rate and Reverse Repo Rate is that, with an increase in the Repo rate the borrowings of the commercial banks from RBI becomes dearer and as the result, fewer funds are borrowed.
Whereas, with an increase in the Reverse Repo Rate the RBI borrows money from commercial banks at a much higher rate, with the intention to regulate the supply of money in the economy.