Repo and Reverse Repo rates

Date Published: March 23, 2021

Repo Rate :

The term ‘Repo’ stands for ‘Repurchase agreement’. Repo is a form of short-term, collateral-backed borrowing instrument and the interest rate charged for such borrowings is termed as repo rate. In India, repo rate is the rate at which Reserve Bank of India lends money to commercial banks in India if they face a scarcity of funds. Commercial banks sell government securities and bonds to Reserve Bank of India with an agreement to repurchase the securities and bonds from Reserve Bank of India on a future date at a pre-determined price including interest charges.

Reverse Repo Rate :

Reverse repo as the name suggests is an opposite contract to the Repo Rate. Reverse Repo rate is the rate at which the Reserve Bank of India borrows funds from the commercial banks in the country. In other words, it is the rate at which commercial banks in India park their excess money with Reserve Bank of India usually for a short-term.

Importance of Repo Rate and Reverse Repo Rate

  • Repo and reverse repo are the monetary measures used by the Reserve Bank of India to deal with the deficiency of funds and liquidity in the market. It is a vital money flow control mechanisms used by the central bank.
  • Bank lending rates are impacted by repo rate and reverse repo rate.
  • Repo and reverse repo are the most effective and efficient tools used by the Reserve Bank of India to achieve price stability and to boost economic development.
  • Repo and reverse repo agreements help banks manage their liquidity requirements easily and with a high degree of safety.

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