Concept of Repo Rate and Reverse Repo Rate

Repo (Repurchase) Rate:

Repo rate also known as 'Repurchase rate' is the rate at which banks borrow funds from the RBI to meet short-term requirements. RBI charges some interest rate on the cash borrowed by banks. This interest rate is called 'repo rate'.

If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate:
Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. This is the exact opposite of repo rate.

RBI uses this tool when it feels there is too much money floating in the banking system. If the reverse repo rate is increased, it means the RBI will borrow money from the bank by offering lucrative rate of interest. Banks feel comfortable lending money to RBI since their money would be in safe hands and with a good interest.

It is also a tool which can be used by the RBI to drain excess money out of the banking system.

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