What is the Reverse Repo Rate?

Posted on Thursday, February 27th, 2025 | By IndusInd Bank

The Reserve Bank of India implements various monetary policies to steer the Indian economy in the right direction. For controlling inflation, interest rates, and liquidity in the market, one important tool the RBI uses is the reverse repo rate. 

What is the reverse repo rate, and why does it matter? In simple terms, it is the rate at which the RBI borrows money from commercial banks to absorb excess liquidity in the market. 

Just like you borrow a personal loan (PL) from a lender, commercial banks and the RBI also lend to, and borrow from, each other. The repo rates and reverse repo rates are tools that regulate this process. 

As a consumer, you must know the meaning of the reverse repo rate and its impact on the economy and financial aspects of your life. Here’s a guide to help you. 

What is the Reverse Repo Rate?

To understand the reverse repo rate meaning, it is essential to first grasp the concept of the repo rate. 

· Repo Rate:

The repo rate is the rate at which the RBI lends money to commercial banks to help them deal with liquidity shortages. When banks borrow from the RBI at the repo rate, they pledge government securities as collateral.  

The repo rate helps control inflation and liquidity in the economy. When the RBI increases the repo rate, borrowing becomes costlier. This can inhibit consumers from borrowing and help curb inflation.

· Reverse Repo Rate:

The reverse repo rate meaning is the opposite of the repo rate meaning. It is the rate at which the RBI borrows funds from commercial banks. 

The reverse repo rate helps the RBI absorb excess liquidity from the banking system and control inflation. Hence, the RBI usually increases the reverse repo rate during times of inflation. 

A higher reverse repo rate encourages banks to deposit funds with the RBI instead of lending in the market. This reduces the holdings that the bank has, leaving them with fewer funds to lend to retail customers.  

Thus, to understand the meaning of the reverse repo rate, one must understand its role as a monetary policy tool to manage liquidity and stabilise the economy.  

How Does the Reverse Repo Rate Affect the Economy? 

The reverse repo rate can affect the economy in major ways, including:   

1. Controlling Inflation

When inflation rises, the RBI increases the reverse repo rate. This helps the RBI absorb excess money from the banking system. As banks deposit more funds with the RBI, there is a reduction in the money supply in the economy.  

2. Regulating Liquidity

During periods of high liquidity, banks usually have surplus funds. By offering a higher reverse repo rate, the RBI encourages banks to deposit this excess money rather than lend it. 

3. Balancing Growth

If the reverse repo rate is too high, lending to consumers and businesses may decline, which may slow down economic growth. On the other hand, a balanced repo rate leads to enough funds for individuals and commercial entities. This provides them with the money to invest and, thus, stimulates economic growth. 

Hence, the RBI adjusts the rate carefully to balance growth and inflation.  

Impact of Reverse Repo Rate on Loans 

The reverse repo rate indirectly influences loans, including personal loans.

• When the RBI increases the reverse repo rate, banks prefer depositing funds with the RBI rather than lending to individuals. This means consumers are left with a less amount of funds to borrow from. 

• Hence, higher reverse repo rates may lead to banks increasing their lending interest rates. As a result, loans like personal loans become costlier. Borrowers may end up paying higher EMIs on loans.  

• When banks have less money to lend, businesses and individuals might also delay taking loans. This can lower the demand for credit.  

• Borrowers who want affordable loans should keep checking the changes in the repo rate and reverse repo rate to apply at the right time.  

Individuals can also use tools like the PL loan EMI calculator to plan their loan borrowing and repayment strategically. 

Also Read: What is the MCLR Rate and How Does it Affect Loans?

Conclusion

The reverse repo rate is a crucial monetary policy tool that the RBI uses to control liquidity and maintain economic balance. While one of its major roles is to regulate inflation and the money supply, its effects also influence interest rates and loan affordability. As a consumer and potential borrower, you must learn about what the reverse repo rate is and keep a keen eye on the changing rates to secure a loan at the right time.

Also, consider applying for your personal loan with IndusInd Bank. Competitive interest rates, no collateral requirements, instant approvals and disbursals, and more – IndusInd Bank has it all. So, apply today! 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.