The Reserve Bank of India (RBI) is the central bank and the apex banking institution of the nation. Commenced on 1st April 1935 in accordance with the Reserve Bank of India Act, 1934, the RBI has been doing a prodigious work. Though being a private entity initially, the Reserve Bank of India was nationalised in 1949 and since then it has been fully owned by the Government of India. From regulating the entire banking structure to dealing with important financial services, it performs the vital economic operations of the nation. The RBI prints currency notes and also work as an advisor to the government to formulate the major economic policies and schemes for the nation. However, to maintain economic and financial stability, the RBI plays a cardinal role in contriving the monetary policies of the nation to achieve a few objectives. The monetary policy refers to the policies conceived to control the money supply and rate of interests in order to maintain economic stability. To execute this, the RBI has two key instruments with it, called Repo rate and Reverse repo rate, using which it controls the money supply in the economy.
‘Repo’ is the abbreviation of ‘Repurchase agreement’, in which the commercial banks of India sell their bonds and securities to the RBI with a deal to purchase back in future at a pre-decided price. This they do in case of financial emergency when the commercial banks need urgent fund to continue their operation. The RBI lends the required money at a rate, which is called the ‘Repo rate’. The current repo rate is 6.25%.
On the other hand, Reverse repo rate is the opposite of Repo rate. It is the rate at which RBI borrows funds from the commercial banks of India. If the commercial banks have excess money, they lend it to the RBI for a short period. The current reverse repo rate is 6%.
Major differences between the Repo Rate and Reverse Repo Rate
The following are the major differences between repo rate and reverse repo rate:
- The foremost and the most important difference between the repo rate and reverse repo rate is its lender(s) and borrower(s). While both the rates are decided solely by the RBI, the repo rate is the rate at which RBI lends funds to the commercial banks, whereas the reverse repo rate is the rate that RBI offers to the commercial banks for depositing their excess money with the RBI.
- Digging further into it, in the scenario of any financial crunch, the commercial banks sell their securities and bonds to the RBI (with an agreement of future repurchase) and the apex bank lends them money at the repo rate. However, when the commercial banks have a glut of money with them, they tend to deposit that sum with the RBI, to which the RBI propound the commercial banks with the interest called reverse repo rate.
- The repo rate involves the transaction of securities and bonds. Whereas, the reverse repo rate is a mere transfer of funds and doesn’t include any deal in securities and bonds.
- An increment in repo rate discourage the commercial banks to borrow funds from the RBI while increasing the reverse repo rate encourage the commercial banks to deposit funds with the RBI.
- Decreasing the repo rate stir the commercial banks to borrow funds and decreasing the reverse repo rate despondent the commercial banks to deposit funds with the RBI.
Historical Repo Rate vs. Reverse Repo Rate Comparison Chart
Below are the historic repo rate vs. reverse repo rate trend for the last 5 years:
| Date | Repo Rate(%) | Reverse Repo Rate (%) |
| 6 February 2020 | 5.15 (current) | 4.90 (current) |
| 10 October 2019 | 5.15 | 4.90 |
| 7 August 2019 | 5.40 | 5.15 |
| 6 June 2019 | 5.75 | 5.50 |
| 4 April 2019 | 6.00 | 5.75 |
| 7 February 2019 | 6.25 | 6.00 |
| 1 August 2018 | 6.50 | 6.25 |
| 6 June 2018 | 6.25 | 6.00 |
| 2 August 2017 | 6.00 | 5.75 |
| 6 April 2017 | 6.25 | 6.00 |
| 4 October 2016 | 6.25 | 5.75 |
| 5 April 2016 | 6.50 | 6.00 |
| 29 September 2015 | 6.75 | 5.75 |
| 2 June 2015 | 7.25 | 6.25 |
| 4 March 2015 | 7.50 | 6.50 |
| 15 January 2015 | 7.75 | 6.75 |
| 28 January 2014 | 8.00 | 7.00 |
Source: RBI
Impact of Repo Rate and Reverse Repo Rate on Banking
The Reserve Bank of India has been employing these two major tools to formulate monetary policies and control the supply of money and credit in the economy. Alteration in both of them directly impacts the supply of money and the demand for credit. The RBI uses the two as a utility to achieve economic stability, efficient financial system and promoting investment. Moreover, changing the rates also determines the interest rate on loans offered to the public, which subsequently affects the volume of demand for loans by the public.
Impact of Repo Rate on Loans and EMIs
There is an unswerving relationship between repo rate and reverse repo rate with the quantity and quality of loans being offered by the commercial banks to the general public. The primary aim of RBI to alter the rates is to control the flow of credit and the supply of money into the economy. If RBI seeks to decrease the amount of money in the economy for some reason, it increases the repo rate. A hike in repo rate makes it difficult to borrow funds from the RBI. This escorts the commercial banks to charge a high rate of interest from the public. Thus, reducing the volume of loans being processed. Whereas, the processed loans with a high rate of interest subsequently increase the equated monthly instalments (EMI).
On the opposite side, a dip in repo rate promulgates commercial banks to borrow less expensive funds from the RBI. This is reflected in the part of commercial banks reducing the interest rates on the loans they lend to the public. And as obvious, more credits are being offered to the public, which, in turn, increases the money supply in the economy.
Impact of Reverse Repo Rate on Loans and EMIs
Whenever there is rampant inflation in the economy owing to the voluminous money supply in the economy, the RBI increases the reverse repo rate. An accretion in reverse repo rate lure the commercial banks to deposit their excess funds with the RBI in order to get higher returns. This wave towards depositing money with RBI sways the availability of credit with the general public. The commercial banks find it more profitable to keep money with the apex bank instead of lending it to the public. This reduces the amount of money in the economy and thus results in assuaging inflation. Moreover, less supply and more demand for loans end to expensive loans i.e; loans with higher interest. This manifests itself in increased EMIs.
Contrarily, a decrement in reverse repo rate will truncate the number of deposits from the commercial banks in the RBI. A low reverse repo rate will give unadmirable returns to the commercial banks, this will push them to lend more money to the general public. This will increase the supply of loans over a more or less same demand, thus reducing the cost of loans. An inexpensive loan is usually characterised by low interest rates, which proves to be an encouraging factor to increase the demand for loans. However, if the demand fails to ascertain the expectation, it will result in further sinking of interest rates. Hence, less EMIs on most of the loans.
Conclusion
Both the Repo rate and the Reverse repo rate serve as a utility to control the supply and demand for money and credit in the economy. So far, the tools have been proved to be a great option to regulate the money supply. Furthermore, the RBI employ both the instruments to check inflation and deflation. Since all the commercial banks operate under the guidelines and supervision of the RBI only, the latter has the power to influence the amount of money available with the commercial banks. This they simply achieve by revising the repo rate and the reverse repo rate. These two efficacious tools assist the RBI to maintain financial stability in the economy, particularly in the market. Checked repo rate and reverse repo rate also help the head bank and the government to promote investment and sustain a decent economic growth.
