Repo rate is the rate at which the Reserve Bank of India provides loans to commercial banks against government securities. On the other hand, the reverse repo rate is the interest provided by the RBI to banks who deposit funds with them. Now, let me tell you what is the difference between repo rate and reverse repo rate.
Difference Between Repo and Reverse Repo Rate| Parameters | Reverse Repo Rate | Repo Rate |
| Controls | Money supply in the economy. |
Inflation |
| Rate of interest | Lower than the repo rate. |
Higher than the reverse repo rate. |
| Function | Commercial banks deposit their excess funds with RBI and receive interest on their deposits. |
RBI provides funds to commercial banks against government securities. |
| Borrower’s objective | To reduce the overall money supply in the economy. |
To manage short-term fund deficiency. |
| Purpose | To ensure liquidity in the economy |
To fulfill the deficiency of funds. |
| Impact of lower rate | As banks lend more and reduce their deposits with the RBI, the money supply increases in the economy |
Loans become cheaper as the cost of funds reduces for commercial banks. |
| Impact of higher rate | As commercial banks park more surplus funds with RBI, the money supply in the economy decreases. |
Loans become expensive as the cost of funds increase for commercial banks. |
| Charged on | It is charged on Reverse Repurchase agreement. |
It is charged on Repurchase agreement. |
Impact of Repo Rate on EMIs
Generally, a low repo rate means low-cost loans for people. When the Reserve Bank of India reduces its repo rate, banks also lower their interest rates charged on loans. This decreases the EMI. Similarly, high repo rates mean loans for the customer gets more costly due to the increase in the interest rates.
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What is the difference between repo rate and reverse repo rate?
Samar
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3 Year
2021-09-15T16:55:21+00:00 2021-09-16T17:48:43+00:00Comment
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