How reverse repo rate is auctioned by RBI

Difference between repo rate and reverse repo rate

Repo rate or otherwise known as Buyback auction rate, introduced by the RBI to increase the flow of money in the market, that is, when there is a lack of liquidity in the economy and the interest rate rises, the country's central bank buys state securities and the amount paid to the bank, which improves overall credit.

On the other hand, Reverse repo rate is a fixed cut-off rate, in which the government bonds are sold at auction by the central bank. It helps the bank park its excess funds when the economy has significant liquidity.

These two rates of interest are mainly used to keep the money supply going in the economy; H. To increase or decrease liquidity. So take a look at the article that is presented to you to understand the difference between repo rate and reverse repo rate.

Contents: Repo Rate Vs Reverse Repo Rate

  1. Comparison table
  2. definition
  3. Main differences
  4. similarities
  5. Conclusion

Comparison table

Basis of comparisonRepo rateReverse repo rate
importanceRepo rate is the rate at which the Central Bank of India lends commercial banks against government securities for a short period of time.The reverse repo rate is the rate at which the Central Bank of India commercial banks make a loan.
purposeTo meet the lack of funds.To ensure liquidity in the economy.
ratingHighComparatively less.
ControlsinflationMoney supply in the economy.
Charged onRepurchase agreementRepurchase agreement

Definition of the repo rate

Buyback option or a repo rate is the rate at which the Reserve Bank of India (RBI) loans commercial banks against government securities. It will be offset against the repurchase agreement, i. H. A contract between two parties whereby one party sells its securities to another who promises that the securities will be repurchased over a period of time.

To control inflation, the RBI uses this instrument, which increases the interest rate to reduce commercial bank lending, which in turn reduces inflation.

Definition of the reverse repo rate

The reverse repo rate is exactly the opposite of a repo rate. This is an interest rate at which the commercial bank grants the loan to the Central Bank of India (RBI). The reverse repo rate is always lower as a repo rate.

This is a monetary instrument that the RBI uses to control the money supply in the country i.e. H. With the increase in the interest rate, the flow of money in the economy decreases as the banks now invest their money with the RBI due to the security and the lucrative interest rates.

Main differences between repo rate and reverse repo rate

  1. The main difference between the repo rate and the reverse repo rate is that the repo rate is the rate at which commercial banks borrow from the RBI, while the reverse repo rate is the rate at which RBI has taken out loans from commercial banks.
  2. The repo rate is always higher than the reverse repo rate.
  3. The repo rate is a monetary instrument used by the central bank to control inflation, while a central bank uses the revo repo rate to control the supply of money in the economy.
  4. The goal of the repo rate is to fix the lack of funds. On the other hand, the goal of the reverse repo rate is to ensure liquidity in the economy.
  5. The repo rate is calculated for the repurchase agreement, while the reverse repo rate is calculated for the repurchase agreement.

similarities

  • Both are mandated by the Reserve Bank of India.
  • Both are bank interest rates.
  • Both affect the liquidity of the economy.

Conclusion

After a brief discussion of these two terms, we came to the conclusion that the two entities are opposite to each other. The main difference between the repo rate and the reverse repo rate is that if the repo rate increases, the loans of the commercial banks by the RBI become more expensive and, as a result, less money is taken out.

With an increase in the reverse repo interest rate, on the other hand, the RBI borrows much higher loans from commercial banks in order to regulate the money supply in the economy.