Banking Awareness Terms- What is Repo Rate and Reverse Repo Rate?

If you are preparing for banking exams then this is the best article to the readout. In this article, we will be discussing Repo Rate and Reverse Repo rate to clear all your doubts regarding this topic.

Banking Awareness is one such topic that can help you to ace the general awareness section with good marks. You can not ace this section in a day or two because it is an application based topic and thus require a great in-depth knowledge of the subject. This section will help you sail through the general awareness section with great marks. This topic is going to play an important role in your interview because the maximum number of questions are asked from this topic as a banking aspirant is expected to know at least the basics of banking awareness. We are providing you with an article on topic Repo Rate and Reverse Repo Rate which you can use as study notes. In this article we will be discussing two of the most commonly used banking terms that are Repo rate and reverse repo rate.

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Difference between Repo Rate and Reverse Repo rate

Repo rate Reverse Repo rate
Repo rate is  the rate at which RBI lends money to commercial banks. Reverse Repo rate  is the rate at which RBI borrows money from commercial banks.
It is always higher than the reverse repo rate It is keep at a lower rate than the repo rate
It is used to control inflation and deficiency of funds It is used to manage cash-flow
It involves the sale of securities which would be repurchased in future. It involves the transfer of money from one account to another.
Current Repo Rate: 4.4% Current Reverse Repo Rate: 4%

Repo Rate

Repo rate is the rate at which RBI lends money to commercial banks. This instrument is used by the commercial banks when they have shortage of money or the demand of loan is more than the capital with them. So inorder to meet the demand of the market, commercial banks can use repo rate instrument to get capital from RBI.

Lets Understand better with an example:

Suppose you have 100 rupees and your friend has asked for 150 rupees and has promised to give you interest. Now, you probably would get the extra 50 rupees from your parents to meet the demand of your friend and lend it to him. Your parents will be happy to give you those extra amount needed as they will be gaining some extra money on it. This is exactly how it works in banks on larger scale. Where bank( you) lends money to its customers ( your friend) by borrowing money from RBI ( Your parents), if there is some shortage of money.

Repo rate instrument is also use to control Inflation by RBI. Whenever there is an excess money in the market, RBI will increase the repo rate to absorb that extra money and control inflation.

Reverse Repo Rate

Reverse repo rate is the rate at which commercial banks lend money to Reserve Bank Of India. We can also consider that Reverse repo rate is just an instrument through which RBI parks the excess money deposit with the commercial bank with itself. Reverse repo rate is always low as compared to repo rate because to discourage banks from parking their amount in RBI, instead the goal of the commercial bank as directed by RBI should be lend as much loan as possible to maximize the profit and also for the development of the Priority sector.

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