The Reserve Bank of India has announced the monetary policy of India today. The key highlight was that the Repo rate and the Reverse Repo rates were kept unchanged at 4% and 3.35%. The Marginal Standing Facility (MSF) was also unchanged by RBI this time. Let us know the difference between the three terms, Repo Rate, Reverse Repo Rate and Marginal Standing Facility in the article below.
The Repo Rate is a term used in short for Repurchase Agreement while the Reverse Repo Rate is the term for Reverse Repurchase Agreement. MSF stands for Marginal Standing Facility.
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The difference between the three can be seen in the table below
Repo Rate vs Reverse Repo Rate vs MSF:
| Repo Rate | Reverse Repo Rate | Marginal Standing Facility |
| Repo Rate is the rate at which the Central Bank grants loans to the commercial banks against government securities. | Reverse Repo Rate is the rate offered by the RBI to the banks that deposit funds with it. | Marginal Standing Facility (MSF) is a special window for commercial banks to borrow from the RBI against approved government securities. |
| Rate of interest in case of Repo rate is higher than the Reverse Repo Rate | The Reverse Repo rate has always a lower interest rate than the repo rate | The interest rate of MSF is higher than the Repo Rate |
| Repo Rate is there to meet short-term financial needs | Reverse Repo Rate reduces the overall supply of money in the economy | Marginal Standing facility leads to overnight lending to banks |
| Repo rate controls the inflation in the economy | Reverse Repo Rate controls the money supply in the economy | MSF controls the mismatch in short-term asset liability more effectively |
| A high repo rate means the cost of short-term money is high leading to slow down the economic growth | High Reverse Repo Rate means the money supply in the economy decreases as commercial banks deposit more surplus funds with RBI | High MSF means the Cost of borrowing overnight money would increase |
| The purpose of Repo Rate is to fulfil the deficiency of funds | The purpose of the reverse repo rate is to maintain liquidity in the economy | MSF controls severe shortage of liquidity |
The controlling authority for the Repo and the Reverse Repo rate is the Reserve Bank of India or RBI. The Central Bank uses this tool to control the money supply in the economy. The banks generally prefer to lend their money to RBI which is safer than lending it to the public. An increase in repo rate means that borrowing from RBI would become costly. This in turn raises the interest rates and reduces the money supply in the economy.
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