Both ‘repo rate’ and ‘reverse repo rate’ are commonly used terms in the banking sector. Every time Reserve Bank of India (RBI) come out with its bi-monthly policy review, both these terms start buzzing in the news headlines. Here we will understand what repo rate and reverse repo rate actually mean. While repo rate is the interest charged by the central bank as it repurchases securities sold by commercial banks, reverse repo rate is the interest that is offered by the Reserve Bank of India (RBI) to these banks who deposit surplus funds with it.
The rate of interest at which banks borrow funds from the central bank by selling their bonds and securities is called repo rate. Or, the rate at which RBI lends funds to these banks is called repo rate. The banks borrow when they are unable to meet their expenses or face financial crunch. A repurchasing agreement is signed by both lender and borrower that states the securities will be repurchased on a given date and at a predetermined price.
Reverse repo rate
The rate of interest that RBI offers to banks who deposit their into their treasury. Repo or repurchase rate is exactly opposite of repo rate. It is the interest rate earned by the depositing bank is called reverse repo rate. Banks do such when they have excess funds at their disposal and choose to in RBI which is safer than lending it to their account holders or other firms.