What is Repo & Reverse Repo Rate? Meaning, Definition and Differences | maijson GKB.

While the repo rate is intended to control liquidity in the economy, the reverse repo rate is used to manage cash flow in the market. When the economy is facing inflation, the central bank raises the reverse repo rate in an effort to persuade commercial banks to deposit money with it and earn interest.

Repo Rate: The interest rate at which a country's central bank loans money to commercial banks for a brief period of time—usually overnight—is referred to as the repo rate, sometimes known as the repurchase rate. In this deal, the central bank promises to buy back the government securities it sells to commercial banks later.

The primary objectives of the repo rate are to regulate the money supply and inflation. When the central bank raises the repo rate, banks find it more expensive to borrow money, which results in a decrease in the money supply. Conversely, a lower repo rate makes borrowing less expensive, which encourages banks to give out more credit and increase the amount of money in circulation.

Key points about Repo Rate:

As a tool to manage inflation, a higher repo rate tightens the money supply while a lower rate loosens it.

The central bank uses the repo rate to express its views on monetary policy.

Reverse Repo Rate: The reverse repo rate is the interest rate at which the central bank borrows money from commercial banks. In this transaction, the central bank sells securities to banks with the promise that it will subsequently buy the securities back. The reverse repo rate is used by the banking sector to absorb surplus liquidity. When the reverse repo rate is raised and banks find it more attractive to deposit their excess cash with the central bank, the money supply is reduced. Conversely, a lower reverse repo rate incentivizes banks to use their funds elsewhere rather than lending to the central bank, hence increasing the money supply.

Key points about Reverse Repo Rate:

Taking up extra liquidity from the financial system is one of its duties. Commercial banks are encouraged to lend to the central bank via a rise in the reverse repo rate.

Distinction Between Repo Rate and Reverse Repo Rate:

S.No.	Repo Rate	Reverse Repo Rate
1	The lender is the central bank, while the borrower is the commercial bank.	The commercial banks are the lender and the central bank is the borrower.
2	The repo rate is intended to control the short-term fund deficit.	Reducing the amount of money in circulation across the economy is the aim.
3	The interest rate on repo rates is higher than that on reverse repo rates.	Compared to the interest rate, the repo rate is higher.
4	The interest charge associated with the repo rate is applied through a repurchase agreement.	There is a relevant interest charge through a reverse repurchase agreement.
5	Government bonds are used as collateral by commercial banks using the repo rate mechanism to get cash from the central bank.	Under the reverse repo rate, commercial banks deposit excess funds with the Central Bank, thereafter the deposit is credited with interest.
6	The cost of loans increases as a result of increased rates since they increase the funding costs for commercial banks in the repo rate.	Because more excess funds are being parked with the central bank by commercial banks, the money supply in the economy shrinks when the rate is high.
7	Loan interest rates are lowered as a result of the rate reduction because it decreases the cost of funds for commercial banks.	Banks lend more money and accept fewer central bank deposits when interest rates are low, which boosts the amount of money in the economy.

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