The Reserve Bank of India (RBI) on April 9, 2025, cut the repo rate by 25 basis points (bps), bringing it down from 6.25 per cent to 6 per cent during the meeting of the Monetary Policy Committee (MPC) headed by RBI Governor Sanjay Malhotra.
The April RBI policy meet, scheduled between April 7 to 9, happened amid the brewing global trade tensions and high market volatility due to the recent reciprocal tariffs announced by US President Donald Trump, which has fueled the fears of a global recession.
The six-member MPC also changed the policy stance to 'accommodative' from 'neutral', which means it would be more open to cut rates in the future. RBI MPC also decided to slash the Gross Domestic Product (GDP) growth to 6.5 per cent in 2025-26 from 6.7 per cent projected earlier. The RBI has also projected the Consumer Price-based Inflation (CPI) at 4 per cent from 4.2 per cent for FY26.
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 used by the central bank 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, increasing the overall money supply in the economy.
Higher Repo Rate:
Conversely, when the RBI raises the repo rate, borrowing becomes more expensive for banks. This can discourage banks from lending, leading to a decrease in the money supply and potentially curbing inflation.
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.
The Reverse Repo Rate helps absorb excess liquidity from the banking system, thereby reducing the overall money supply. By reducing the money supply, the RBI can help control inflation and maintain financial stability.
Higher Reverse Repo Rate:
When the central bank increases the reverse repo rate, it becomes more attractive for commercial banks to park their surplus funds with the central bank (e.g., the RBI) at a 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 deposit their funds with the central bank. Banks are more likely to lend out their funds instead of earning a lower interest rate on deposits with the central bank, thus increasing 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.
Comparison Table: Repo Rate vs. Reverse Repo Rate
| Feature | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Definition | The rate at which the RBI lends money to banks | The rate at which the RBI borrows money from banks |
| Purpose | To inject liquidity into the economy | To absorb liquidity from the economy |
| Borrower | Commercial Banks | Reserve Bank of India |
| Lender | Reserve Bank of India | Commercial Banks |
| Impact on Money Supply | Lower repo rate increases money supply, and higher repo rate decreases money supply | Higher reverse repo rate decreases money supply, and lower reverse repo rate increases money supply |
| Current Rate (example) | 6 per cent (as per recent monetary policy) | 3.35 per cent (subject to change by RBI) |
| Collateral | Requires banks to pledge government securities | No collateral is required |
Conclusion
In the world of banking and finance, two terms that frequently appear in headlines and economic discussions are Repo Rate and Reverse Repo Rate. These two interest rates play a crucial role in a country's monetary policy, especially when it comes to controlling inflation, managing liquidity, and influencing economic growth.
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 — they impact our daily lives. Understanding the difference between repo and reverse repo rate is essential for students preparing for UPSC, SSC, banking exams, or even for someone wanting to be more financially literate.
Also read: Difference Between Digital Wallets and UPI
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