What Is Reverse Repo Rate?

Reverse Repo Rate is one of the many tools at the disposal of the Reserve Bank of India. Reverse Repo Rate is basically a tool of Monetary Policy that the RBI uses to control liquidity and inflation. RBI borrows money for short term from banks, and Reverse Repo Rate is the interest rate paid on that. Reverse Repo Rate is the “reverse” or opposite of Repo Rate, the latter being the interest at which banks borrow money for short term from the RBI. As compared to the Reverse Repo Rate, Repo Rate is higher. Thus RBI gets money in times of distress, and the banks enjoy the benefits of good returns, everybody wins.
Reverse Repo Rate finds numerous applications. An attractive Reverse Repo Rate invites banks to deposit money to the RBI to enjoy special gains. This causes a limit to the money supply in the market, resulting in the strengthening of the Rupee and gaining control over inflation. This also checks the liquidity in the banking system. Moreover, since Reverse Repo Rate appeal to banks, they chose to deposit their surplus funds to the RBI instead of giving it away in the form of home loans, thus putting a check on the home loan rate market as well.

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