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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 appea...

RBI has recently reduced the repo rate to 5.15%. This reduction has shifted the RBI’s stance from calibrated tightening to neutral. Determination of Repo Rate RBI makes its monetary policies based on the Consumer Price Index and inflation. Repo rate is the rate at which banks borrow money from RBI against government securities. An increase in repo rate discourages banks from availing the loan, while decreases in repo rate encourage them to avail loan from RBI. Controlling inflation is the central aspect behind making any changes in the repo rate . The effect of repo rate cut falls on all entities, be it companies, individuals, or firms. Effect on Companies Lower repo rate means lower borrowing rates. This makes it cheaper for companies to avail loan from banks and expand their business. Effect on Individuals Individuals usually celebrate the reduction of repo rate, as the general thought process is, lower the repo rate lower will be the interest rate on loan. However, it is...