Repo Rate vs. Reverse Repo Rate — What's the Difference?
Edited by Tayyaba Rehman — By Fiza Rafique — Published on December 19, 2023
Repo Rate is the interest rate at which banks borrow from the central bank, while Reverse Repo Rate is the rate at which the central bank borrows from banks.
Difference Between Repo Rate and Reverse Repo Rate
Table of Contents
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Key Differences
Repo Rate and Reverse Repo Rate are both pivotal instruments used by a country's central bank to control liquidity and money supply in the market. Repo Rate is the rate at which commercial banks borrow funds from the central bank. When banks face a shortage of funds, they borrow from the central bank at this rate.
Reverse Repo Rate, on the other hand, is the rate at which the central bank borrows money from commercial banks. This mechanism is used when there's excess liquidity in the banking system. Banks, looking for avenues to safeguard their surplus funds, find it profitable to lend to the central bank at the Reverse Repo Rate.
Repo Rate and Reverse Repo Rate serve as tools for the central bank to either infuse or absorb liquidity from the market. When the Repo Rate is increased, borrowing from the central bank becomes costlier, thus deterring banks from borrowing and leading to reduced money supply. On the other hand, a higher Reverse Repo Rate means that banks get a better return on funds lent to the central bank, leading them to prefer lending to the central bank rather than to the general public or businesses.
Both Repo Rate and Reverse Repo Rate are vital in the central bank's arsenal to regulate inflation, promote economic growth, and manage currency stability. While Repo Rate primarily influences the cost of borrowing for banks and, by extension, for consumers and businesses, Reverse Repo Rate impacts where banks park their excess funds, either with the central bank or in the market.
Comparison Chart
Purpose
For banks to borrow from central bank.
For central bank to borrow from banks.
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Effect on Liquidity
Decrease in Repo Rate increases liquidity.
Increase in Reverse Repo Rate decreases liquidity.
Relation to Money Supply
Influences borrowing cost and money supply.
Determines where banks park their excess funds.
Usage by
Used by banks in need of funds.
Used by central bank to control excess liquidity.
Impact on Economy
Affects borrowing rates for consumers and businesses.
Affects where banks invest or park their surplus money.
Compare with Definitions
Repo Rate
The rate influencing the short-term lending rates in the economy.
Entrepreneurs monitor the Repo Rate closely as it affects their business financing.
Reverse Repo Rate
A method for the central bank to absorb excess money from banks.
The central bank raised the Reverse Repo Rate to tackle the oversupply of money.
Repo Rate
A tool used by the central bank to control liquidity in the market.
A reduction in the Repo Rate can stimulate economic activity.
Reverse Repo Rate
The interest rate at which the central bank borrows from commercial banks.
A high Reverse Repo Rate can indicate surplus liquidity in the banking system.
Repo Rate
The interest rate at which commercial banks borrow from the central bank.
When the Repo Rate increased, bank loans became more expensive.
Reverse Repo Rate
A signal of the central bank's intent to manage liquidity.
An increase in the Reverse Repo Rate often results in banks reducing lending to the public.
Repo Rate
The benchmark interest rate determining the cost of borrowing for banks.
With a hike in the Repo Rate, many banks revised their lending rates upward.
Reverse Repo Rate
The benchmark determining the returns on funds banks keep with the central bank.
Banks weighed the advantages of lending in the market versus the attractive Reverse Repo Rate.
Repo Rate
A rate that reflects the central bank's monetary policy stance.
Analysts predict a cut in the Repo Rate to combat the recession.
Reverse Repo Rate
The rate at which banks park their excess funds with the central bank.
In times of uncertainty, banks might prefer the safety of the Reverse Repo Rate.
Common Curiosities
How does Repo Rate impact the economy?
A high Repo Rate can make borrowing more expensive, potentially slowing down economic activity.
What is Repo Rate?
Repo Rate is the interest rate at which banks borrow from the central bank.
How is Repo Rate related to inflation?
By adjusting the Repo Rate, the central bank can influence borrowing costs and, consequently, spending, thus managing inflation.
What is Reverse Repo Rate?
It's the rate at which the central bank borrows money from commercial banks.
Do consumers get affected by changes in the Repo Rate?
Yes, as it can influence interest rates on loans and credit offered by banks.
How do Repo Rate and Reverse Repo Rate work together?
While Repo Rate influences borrowing costs, Reverse Repo Rate affects where banks invest their surplus.
Why would a central bank increase the Reverse Repo Rate?
To absorb excess liquidity from the banking system.
How does the Reverse Repo Rate affect banks' lending behavior?
A higher Reverse Repo Rate can incentivize banks to lend more to the central bank and less to the public.
Is a high Reverse Repo Rate good for banks?
It can be, as banks earn a better return when they park their excess funds with the central bank.
Why is the Reverse Repo Rate typically lower than the Repo Rate?
It provides a corridor within which short-term money market rates can fluctuate.
Why is Repo Rate important for banks?
It determines the cost at which they can borrow from the central bank during fund shortages.
How often can these rates change?
The frequency varies, but central banks usually review them periodically based on economic conditions.
Are Repo Rate and Reverse Repo Rate the only tools for monetary policy?
No, they are two of several tools central banks use to manage economic stability.
What happens if banks don't lend to the central bank at the Reverse Repo Rate?
They might seek other avenues for their surplus funds, such as lending to the public or other financial instruments.
Can commercial banks negotiate these rates?
No, these rates are set by the central bank and apply uniformly to all commercial banks.
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Written by
Fiza RafiqueFiza Rafique is a skilled content writer at AskDifference.com, where she meticulously refines and enhances written pieces. Drawing from her vast editorial expertise, Fiza ensures clarity, accuracy, and precision in every article. Passionate about language, she continually seeks to elevate the quality of content for readers worldwide.
Edited by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
