Difference between Repo Rate and Reverse Repo Rate
A repo rate and reserve rate is a monetary tool used by the central banks to maintain and control the economy. By using repo rate and reverse repo rate a central bank is able to balance the demand and supply of the money in the market.Repo rate
- A repo rate is the short form of repurchase rate
- A repo rate is also called as the cost of credit.
- A repo rate is managed by the central authority of the government (RBI in India)
- The main function of repo rate is to increase the flow of money in the economy and to maintain liquidity.
- When in a market, there is a lack of liquidity the interest rate is raised and vice a versa.
- A repo rate is a rate at which the central bank grants a loan to the commercial banks against government securities.
- Central bank used this function to control the inflation in the economy and to reduce the borrowings of the commercial banks.
- In simple language, a rate at which RBI lends money to commercial banks, by an agreement that banks will repurchase the same pledged securities at a future date with predetermined price, against pledge of government securities when banks needed a fund to meet their day to day transactions.
Reverse repo rate
- A reverse repo rate is a rate by which the government securities are sold by the central authority in an auction.
- It is a monetary instrument used to maintain supply in the market.
- A reverse repo is the opposite of the repo rate.
- A reverse repo rate is a rate at which the commercial banks give a loan to the central authority.
- A reverse repo rate is always lower than the repo rate.
- If a reverse repo rate increases will decrease the money supply and if it decreases, the money supply increases.
- If a reverse repo rate increases it will beneficial to the commercial banks means a commercial bank can invest more money in the commercial bank.
Difference between Repo Rate and Reverse Repo Rate
| Basis | Repo rate | Reverse rate |
|---|---|---|
| Meaning | A repo rate is a rate at which the central bank grants a loan to the commercial banks against government securities. | A reverse repo rate is a rate at which the commercial banks give a loan to the central authority. |
| The Rate charged by | A repo rate is charged by the central bank. | A reverse repo rate is charged by the commercial bank. |
| Effect on economy | A high repo rate drains excess liquidity from the economy. | A reverse repo rate injects liquidity into the economy. |
| Effect on commercial bank | When a repo rate is higher, commercial banks have to pay a high rate of interest to get a loan from the central bank. | In reverse repo rate, the situation is totally opposite to the repo rate. |
| Usage | A repo rate is used to control inflation in the economy. | A reserve repo rate is used to control the money supply in the economy. |
