Repo Rate vs Reverse Repo Rate
Repo rate vs reverse repo rate for UPSC: RBI lending to banks versus banks parking surplus funds — corridor, collateral, and liquidity effects.
Start here
Repo rate is the rate at which RBI lends short-term funds to banks against government securities; reverse repo rate is the rate at which RBI absorbs banks’ surplus liquidity by accepting deposits.
Think of repo as RBI acting as a short-term lender of last resort to banks, and reverse repo as RBI offering a safe parking lot when banks have excess cash. Together they form the policy rate corridor.
Side-by-side comparison
| Feature | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Collateral | Government securities | Government securities |
| Inflation link | Repo ↑ → lending rates ↑ → demand cools | Reverse repo ↑ → incentive to park funds |
| Who pays interest | Bank pays RBI on borrowed funds | RBI pays bank on parked funds |
| Policy role | Benchmark policy rate set by MPC | Floor of the liquidity corridor |
| Typical tenure | Overnight / short-term repo windows | Overnight absorption |
| Liquidity effect | Injects liquidity into banking system | Drains excess liquidity from system |
At a glance
Direction
RBI → Bank (lending)
Bank → RBI (parking)
Effect
Liquidity injection
Liquidity absorption
Rate level
Higher
Lower
Bank has extra cash after festival season
After heavy deposits during Diwali, a bank has surplus funds. At reverse repo rate, parking money with RBI is attractive and safe. When liquidity is tight before tax outflows, RBI lends via repo so banks can keep lending to businesses.
What this means for the exam
Repo injects liquidity; reverse repo absorbs it. Repo rate > reverse repo rate — always.
Prelims statement check
“Reverse repo rate is higher than repo rate.”
Incorrect — Corridor rule
Repo is always the ceiling; reverse repo is the floor of the corridor.
“Repo rate is decided by the Monetary Policy Committee chaired by the RBI Governor.”
Correct — MPC authority
Since 2016, MPC sets the policy repo rate bi-monthly under the inflation-targeting framework.
PYQ Linkage
Consider the following markets:
-
Government Bond Market
-
Call Money Market
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Treasury Bill Market
-
Stock Market
How many of the above are included in capital markets?
Key Takeaway
Repo = RBI lends (inject) | Reverse repo = banks park (absorb) | Repo rate is always higher