Reverse Repo Rate

The Reverse Repo Rate is an important Monetary Policy tool used by the Reserve Bank of India (RBI) to control liquidity and inflation in the economy.

What is the difference between repo rate and reverse repo rate?

• Under the Reverse Repo Rate, banks deposit excess funds with the RBI and earn interest for it.
• The opposite of Reverse Repo Rate is the Repo Rate, at which the banks borrow short-term money from the RBI.

How is Reverse Repo Rate used to control inflation?

• RBI increases the Reverse Repo Rate so as to incentivise the banks to deposit surplus funds with it to earn higher interest on them.
• It reduces the supply of money in the system, thus controlling inflation.
• Similarly, when the RBI has to stoke inflation a little, it may choose to cut Reverse Repo Rate and Repo Rate, which frees up the money supply.

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