Understand Repo and Reverse Repo terms


Repo Rate & Reverse Repo Rate 

Current Repo rate : 4.00%

Current Reverse Repo rate : 3.35% 

The term ‘Repo’ stands for ‘Repurchase agreement’. Repo is form of short-term, interest-bearing and collateral-backed borrowing. Interest rate for such borrowings is termed as repo rate. Repo is basically a short-term money market instrument which is used to raise capital for the shorter-term. In Indian Banking terms, repo rate is the rate at which Reserve Bank of India lends money to all the commercial banks in the country in the event of scarcity of funds. In other words, it is the rate at which Commercial Banks sell their securities and bonds to Reserve Bank of India with an agreement to repurchase the securities and bonds from Reserve Bank of India on a future date at a pre-determined price. The repurchase agreement is signed by both parties involved in the transaction. 


 Reverse repo is an opposite contract to the Repo Rate. Reverse Repo rate is the rate at which Reserve Bank of India borrows funds from all the other commercial banks in the country. In other words, it is the rate at which commercial banks in India park their excess money with Reserve Bank of India for a short-term period. Current reverse repo rate is calculated at 6%.


Importance of Repo Rate and Reverse Repo Rate


* Repo and reverse repo are the monetary measures used by the Reserve Bank of India to deal with the deficiency of funds and liquidity in the market. It is one of the vital money control mechanisms used by the central bank of the country.

* Bank lending and investment rates are decided based on the repo rate and reverse repo rate.

* Repo and reverse repo are the most effective and efficient tools used by the Reserve Bank of India to achieve price stability and to boost economic development.

* Repo rate and reverse repo rate are among the most crucial monetary policy instruments available to the RBI.

* There is considerable rise in borrowing by commercial banks through repo route which makes it an important element of India’s monetary policy framework. 

The constant nature of the balance between Repo and Reverse-Repo makes it more powerful in the Indian banking system.

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