What is Repo Rate and Reverse Repo Rate

What is Repo Rate?

'Repo Rate' is the rate at which the central bank (RBI in case of India) lends money to the commercial banks to meet the short term needs. Repo Rate is one of the credit-control methods of the central bank. The central bank advances loans against approved securities or eligible bills of exchange. An increase in repo rate increases the cost of borrowing from the central bank. It forces the commercial banks to increase their lending rates, which discourages borrowers from taking loans. It reduces the ability of commercial banks to create credit. Similarly, the decrease in repo rate will decrease the cost of borrowing from the central banks. As a result, commercial banks will lend money at a low-interest rate to the people Which encourages borrowers to take loans. The central bank uses this tool to fight against inflation.

What is Reverse Repo Rate

Reverse Repo rate is the exact opposite of the Repo rate. Reverse Repo Rate is the at which the central bank borrows money from the commercial banks. The central bank(RBI in case of India) makes use of this tool when it feels that there is excess money supply in the banking system. An increase in the Reverse Repo Rate induces the banks to transfer more funds to the central bank due to attractive interest rates.