Difference Between Repo Rate and Reverse Repo Rate

The Reserve Bank of India (RBI) decides the repo rate bi-monthly which is after every 2 months. This is done through its six-member Monetary Policy Committee (MPC). Each of these meeting lasts three days, and the final decision is announced on the last day of the meeting.

The RBI policy meet, scheduled between 3 to 5 August 2026, has currently kept the repo rate to be unchanged at 5.25%. On the other hand reverse repo rate also remains the same which is 3.35%. In this article, we will understand what is the difference between Repo Rate and Reverse Repo Rate.

What is Repo Rate?

In banking, Repo Rate refers to 'Repurchase Option' or 'Repurchase Agreement' Rate. 

As per RBI, "Repo is a money market instrument, which enables collateralised short-term borrowing and lending through sale/purchase operations in debt instruments."

In simple terms, repo rate is the interest rate at which the RBI lends money to commercial banks for short-term needs, against government securities such as treasury bills or government bonds as collateral. 

Repo rate is a key tool that is used by the central bank so as to manage inflation and liquidity in the economy. Repo Rate has a direct impact on loans and EMIs for cars, houses, education, personal or business, credit cards, and mortgages. 

Lower Repo Rate:

When the Reserve Bank of India (RBI) lowers the repo rate, it becomes cheaper for banks to borrow money from the RBI. This encourages banks to lend more money to businesses and individuals which increases the overall money supply in the economy. 

Higher Repo Rate:

In contrast, when the RBI increases the repo rate, borrowing becomes more expensive for banks. This can lead banks to hold major lending and a decrease in the money supply.  

What is Reverse Repo Rate?

The Reverse Repo Rate is the interest rate at which the RBI borrows funds from commercial banks. It’s the opposite of the repo rate. The reverse repo rate is the rate that the RBI pays to the commercial banks when they park their excess funds with the central bank. 

Higher Reverse Repo Rate:

When the central bank increases the reverse repo rate, it becomes beneficial for commercial banks to park their surplus funds with the central bank as they get higher interest rate. This reduces the amount of money that banks have available to lend out to businesses and individuals, thereby decreasing the overall money supply in the economy.

Lower Reverse Repo Rate:

When the central bank decreases the reverse repo rate, it becomes less attractive for commercial banks to store their money with the central bank. Banks will prefer to lend out their funds instead of earning a lower interest rate on deposits with the central bank and this can increase the money supply in the economy.

Key Differences Between Repo Rate and Reverse Repo Rate

Before we look at the table, let’s understand a simple analogy. Think of Repo Rate as the interest charged by the RBI when giving money to banks. Reverse Repo Rate is the interest the RBI pays when taking money from banks. 

When people read headlines like “RBI hikes repo rate by 25 basis points,” or “Reverse repo rate remains unchanged,” it is important to understand what exactly these terms mean, and why they are so important. It directly affects home loan EMIs, savings interest rates, and inflation trends. These are not just technical terms limited to economists but they impact our daily lives.

Also read: Difference Between Digital Wallets and UPI