What is the Difference Between Repo Rate & Reverse Repo Rate?

The Reserve Bank of India (RBI) lends money to commercial banks at a repo rate, which helps banks maintain liquidity in the event of a funding crisis or to meet regulatory requirements. The Repo Rate is a fundamental tool for controlling inflation and ensuring economic stability. Repo rate & reverse repo rate are interest rates that directly affect a country's economy. Both of these interest rates are important tools for central banks to monitor liquidity and control inflation, resulting in economic stability.

The reverse repo rate has a greater influence on citizens, particularly those who have taken out a loan. A central bank's modifications to the reverse repo rate affect a consumer's borrowing costs. This is why understanding these two interest rates is crucial since it allows the average person to choose a more affordable interest rate when applying for a loan. In this blog, we will discuss about the key differences about repo rate & reverse repo rate in detail-.

Latest Update: RBI has cut down the repo rate by 50 basis points on 6 June 2025.  Current RBI Repo rate is 5.5% which is reduced from 6%.  This the the third time this year that rate has been changed.

What is Repo Rate?

Repo rate (RR) is the interest rate on which RBI grants loans money to commercial banks. The term 'Repo' comes from the word "Repurchase Agreement." In layman's terms, a repo transaction is a short-term borrowing arrangement in which financial institutions, usually commercial banks, keep government securities as collateral to the central bank with an agreement to repurchase them in future. The Repo Rate is the interest rate on which the central bank grants loans to commercial banks against government securities as collateral.

What is Reverse Repo Rate?

Reverse repo rate (RRR) is the opposite of the repo rate where RBI borrows from commercial banks and the bank charges RBI a reverse repo rate. This means that the RBI pays commercial banks interest for borrowing from them by selling securities. In this case, the central bank purchases securities from commercial banks with the intention of selling them back at a later period and at a predetermined price. It serves as a mechanism for removing excess liquidity from the financial system.

Current Repo Rate and Reserve Repo Rate

The RBI repo rate fell by 0.50% on June 6, 2025, and is currently around 5.5%. The repo rate was last modified in April by 0.25% to 6% and in February by 0.25% to 6.25%. The RBI has set the current RRR at 3.35%.

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What is the Difference Between Repo Rate And Reverse Repo Rate?

Here are the key distinctions between RR and RRR:

Purpose

RR and RRR are the tools that are used by RBI to manage liquidity in the market. Repo rate is used to add excess cash in the market by lending money to banks from the central bank to cover their short-term needs. On the other hand, reverse repo rates are used by the central bank to remove excess liquidity by taking funds from the commercial banks.

Direction of the Transaction:

Repo rate transfers money from the central bank to commercial banks whereas RRR transfers money from commercial banks to the central bank.

Economic impact

A high repo rate raises borrowing costs, which can cut inflation while slowing economic development. A low repo rate achieves the opposite. A high RRR, on the other hand, encourages banks to deposit more funds with the central bank, lowering the money supply and keeping inflation under control. Low reverse repo rates incentivize lending.

Collateral

Repo rates require banks to keep government securities as collateral with the central bank whereas in reverse repo rates, the central bank has to keep its securities as collateral with the banks.

Frequency of use

Repo rates are frequently used to regulate short-term liquidity and control the inflation whereas reverse repo rates are used to absorb excess liquidity and manage the money supply.

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Conclusion

As discussed above, this is how the RR and RRR regulate the economy. These rates have a direct impact on the interest rates that people and corporations pay, affecting everything from personal loans to corporate funding.