Repo Rate vs Reverse Repo Rate 2026
Repo rate vs reverse repo rate is the difference between the rate at which the RBI lends to banks and the rate at which it absorbs their surplus funds. The RBI's Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 5.50% p.a. on 7 October 2026, while the fixed reverse repo rate stands at 3.35% p.a.
Repo Rate
When commercial banks approach the Reserve Bank of India for funds, they're charged a certain amount of interest. The rate at which RBI lends these finances to commercial banks is called the repo rate.
In this case, a repurchasing agreement is signed by both the parties, stating that the securities will be repurchased on a given date at a predetermined price. For instance, let's assume the repo rate fixed by the RBI is 10% p.a. and the amount borrowed by a bank from RBI is Rs.10,000. The interest rate to be paid by the bank will be Rs.1,000.
The repo rate in India is fixed and monitored by India's central banking institution, the Reserve Bank of India. It allows the central bank to control liquidity, money supply, and inflation level in the country.
To decrease the money supply in the economy, the RBI will hike up the repo rate to discourage banks from borrowing funds. Similarly, if the RBI wants to pump funds into the system, it might reduce the repo rate, thus encouraging banks to go ahead and borrow funds.
What is the Current Repo Rate in India?
On 7 October 2026, the Reserve Bank of India (RBI) announced a 25 basis points (bps) increase in the benchmark repo rate, bringing it up to 5.50% p.a. The Monetary Policy Committee (MPC) voted unanimously for the increase.
The MPC also changed its stance to calibrated tightening, which signals that rate cuts are unlikely in the near term and that the next policy action can only be a rate hike or a pause.
Reverse Repo Rate
Reverse repo rate is the interest offered by the RBI to banks who deposit funds into the treasury. For instance, when banks generate excess funds, they may deposit the money in the central bank. This is a much safer approach when compared to lending it to other companies or account holders.
So, the interest earned on the deposited funds is known as the reverse repo rate. As an example, let's assume the reverse repo rate is 5% p.a. A commercial bank has deposited Rs.10,000 in the central bank. This means, the commercial bank will earn Rs.500 p.a. as interest.
This is another financial instrument used by the RBI to control the supply of money in the nation. In case the RBI is falling short on money, they can always ask commercial banks to pitch in with funds and offer them great reverse repo rates in return. This gives banks and other financial institutions the opportunity to earn profit on excess funds.
The fixed reverse repo rate currently stands at 3.35% p.a., while the standing deposit facility (SDF) rate, at which the RBI absorbs surplus liquidity from banks, stands at 5.25% p.a. after the 7 October 2026 policy.
How Does Repo Rate Work?
Here are the details of how does repo rate work:
- To restrict the flow of money in the market, the Indian central bank uses the repo rate
- The repo rate is increased by the RBI when market is impacted by the inflation
- Increase in repo rate implies that the bank will borrow from the Central Bank at high interest rate
What is Affected by a Change in Repo Rate?
The following are some of the economic segments that are affected by the change in repo rate:
- Impacts the EMIs and interest of loans, such as Business Loans, Home Loans, Personal Loans, Car Loans, etc.
- Impacts finance-centric elements such as mutual funds, fixed deposits, savings accounts, etc.
5 Major differences between Repo Rate and Reverse Repo Rate
Besides the way these rates work, there are other differentiators you should know of:
- A high repo rate helps drain excess liquidity from the market, whereas a high reverse repo rate helps inject liquidity into absorb liquidity from the economic system.
- The repo rate is always higher than the reverse repo rate.
- Repo rate is used to control inflation and reverse repo rate is used to control the money supply.
To conclude, the major difference between these two is that an increase in the repo rate will make commercial banks borrow less. Whereas an increase in the reverse repo rate will allow commercial banks to transfer more funds to RBI, which contributes to the money supply.
Previous Repo Rates in India
The following table mentions the previous repo rates in India:
Effective Date | Repo Rate (p.a.) |
28 January 2014 | 8.00% |
15 January 2015 | 7.75% |
4 March 2015 | 7.50% |
2 June 2015 | 7.25% |
29 September 2015 | 6.75% |
5 April 2016 | 6.50% |
4 October 2016 | 6.25% |
2 August 2017 | 6.00% |
6 June 2018 | 6.25% |
1 August 2018 | 6.50% |
7 February 2019 | 6.25% |
4 April 2019 | 6.00% |
6 June 2019 | 5.75% |
7 August 2019 | 5.40% |
4 October 2019 | 5.15% |
6 February 2020 | 5.15% |
27 March 2020 | 4.40% |
22 May 2020 | 4.00% |
6 August 2020 | 4.00% |
9 October 2020 | 4.00% |
May 20224 May 2022 | 4.40% |
8 June 2022 | 4.90% |
5 August 2022 | 5.40% |
30 September 2022 | 5.90% |
7 December 2022 | 6.25% |
6 April 2023 – 6 December 2024 | 6.50% |
7 February 2025 | 6.25% |
9 April 2025 | 6.00% |
6 June 2025 | 5.50% |
5 December 2025 | 5.25% |
6 February 2026 | 5.25% |
8 April 2026 | 5.25% |
5 June 2026 | 5.25% |
5 August 2026 | 5.25% |
7 October 2026 | 5.50% |
Note: The interest rates are effective from 7 October 2026.
How Does the Repo Rate Function?
Banks can take loans from the RBI by pledging securities and repurchasing them the next day. This is basically a short term loan option which is generally for just one day and it aims to help banks face a cash crunch. But sometimes banks may require this loan for over one day. In these cases, it is termed as Term Repo or Variable Rate Term Repo, and the RBI mainly declares an auction for it. This tenure can range between seven days and 28 days.
The overnight repo rate as well as the term repo rate are mainly influenced by the inflation rates. When the inflation rate is quite higher as compared to what the RBI considers acceptable, it might hike the repo rate which helps in controlling it. By lowering the cost of borrowing for borrowers, a decrease in the repo rate can also assist the market become more liquid.
Impact of Repo Rate Change
It will be having a big impact by changing the interest rates even by a small amount. The following points explain the impact of repo rate change:
- Inflation: Inflation can be affected by changes in the repo rate. By lowering borrowing and spending, which can result in less demand for goods and services, a higher repo rate can aid in the control of inflation. In contrast, a lower repo rate may promote economic growth, thus raising demand and prices.
- Investment and Asset Prices: Investment choices and asset prices can be impacted by changes in the repo rate. Investors may seek larger returns in riskier assets like stocks and real estate while interest rates are low. Inflation in asset prices may result from this. Higher interest rates, on the other hand, may make secure investments like bonds more appealing, thus reducing demand for riskier investments.
- Exchange Rates: Exchange rates can also be impacted by changes in the repo rate. A higher repo rate may entice foreign capital to seek greater returns, which could result in the domestic currency appreciating. A lower repo rate may have the opposite result, leading to a decline in the value of the indigenous currency.
- Profitability of Banks: The profitability of commercial banks may be impacted by changes in the repo rate. Banks may make more money on their loans as interest rates rise, but they may also have to pay more interest on their deposits. Lower interest rates, on the other hand, may reduce banks' profit margins.
- Stock Market: Interest rate fluctuations might cause a response in the equity markets. Higher rates can stifle enthusiasm for shares while lower rates may enhance demand for stocks and raise stock prices.
Similarities and Differences Between Repo Rate and Bank Rate
The Bank Rate and Repo Rate are used by the RBI to keep track of the money flow as well as economic activity. The key difference is that with the repo rate, the government security is pledged to the RBI and borrows money. On the other hand, there is no such requirement with the bank rate. The following are the similarities and differences between a repo rate and a bank rate.
Following the 7 October 2026 policy, the Bank Rate and the marginal standing facility (MSF) rate both stand at 5.75% p.a., which is 25 basis points above the repo rate of 5.50% p.a.
Similarities
Repo rates as well as bank rates affect the availability of money and help in controlling inflation. Banks as well as financial institutions are needed to pass the advantages of interest rate cuts to their customers. This means that they have to decrease their base rate. The base rate is the minimum rate of interest at which banks lend money to their customers and the RBI determines the rate. When the Base Lending Rate is reduced, loans become cheaper that results in lower EMIs.
Dissimilarities
The differences between repo rate and bank rate are as follows:
- Banks and financial institutions borrow money from RBI at bank rate with no security. On the other hand, securities are used in the form of collateral for loans at repo rate.
- Loans are given at bank rate for longer tenure. On the other hand, loans are given at repo rate for a shorter time period.
- Bank rate is generally higher as compared repo rate because the RBI provides loans to the banks without any sort of security without pledging security in case of the bank rate.
- Bank rate is correlated with the loan rate. On the other hand, banks may take time to adjust loan interest rates with respect to the change in the repo rate due to its shorter time period.
Summary
Repo rate vs reverse repo rate comes down to direction: the repo rate is what banks pay the RBI to borrow, while the reverse repo rate is what the RBI pays banks to park their surplus funds. The RBI raised the repo rate to 5.50% p.a. on 7 October 2026, which can influence loan EMIs and deposit rates over time. Check your credit score and compare loan offers on BankBazaar to see how repo rate changes affect your borrowing cost.
FAQs on Repo Rate vs Reverse Repo Rate
1.What is the difference between repo rate and reverse repo rate in India?
The repo rate is the interest rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which the RBI borrows surplus funds from them. The repo rate is always higher than the reverse repo rate. Both are tools the RBI uses to manage liquidity and inflation.
2.What is the repo rate?
The repo rate is the rate at which the RBI lends funds to commercial banks against pledged securities. The banks repurchase the securities on an agreed date at a predetermined price. The RBI uses the repo rate to control liquidity, money supply and inflation.
3.What is the reverse repo rate?
The reverse repo rate is the interest the RBI pays commercial banks when they deposit their excess funds with it. It is a safer option for banks than lending the money to other companies or account holders. The RBI uses the reverse repo rate as another instrument to control the money supply.
4.Who decides the repo rate in India?
The Reserve Bank of India decides the repo rate through its Monetary Policy Committee (MPC). The repo rate is reviewed at MPC meetings in light of inflation and growth conditions. The RBI also uses the repo rate to manage liquidity in the economy.
5.How does the repo rate work for banks?
Banks borrow from the RBI at the repo rate by pledging securities and repurchasing them later, usually the next day. This short-term repo rate loan helps banks manage a cash crunch. If a bank needs funds for longer, the RBI may offer a term repo for seven to 28 days.
6.Why does the RBI increase the repo rate?
The RBI increases the repo rate mainly when inflation is higher than it considers acceptable. A higher repo rate makes borrowing costlier for banks and so reduces the flow of money in the market. The repo rate is therefore one of the main tools for controlling inflation.
7.What is the effect of an increase in the repo rate on banks and loans?
When the repo rate increases, banks borrow from the RBI at a higher cost and may pass this on through higher loan interest rates and EMIs. Fewer funds flow into the market, which can reduce spending and demand. The repo rate change can also affect fixed deposits, savings accounts and mutual funds.
8.What happens when the RBI reduces the repo rate?
When the RBI reduces the repo rate, borrowing from the RBI becomes cheaper for banks, which encourages them to borrow and lend more. Loans can become cheaper and EMIs lower over time. A lower repo rate may also promote economic growth by raising demand.
9.What happens if the reverse repo rate is increased?
If the reverse repo rate is increased, banks are encouraged to park more of their surplus funds with the RBI because they earn more on them. This absorbs liquidity and reduces the money available in the economy. The reverse repo rate is therefore used to control the money supply.
10.Why is the repo rate always higher than the reverse repo rate?
The repo rate is the rate banks pay to borrow from the RBI, while the reverse repo rate is the rate they earn when they deposit funds with it. The RBI keeps the repo rate above the reverse repo rate as a rule. This gap keeps borrowing from the RBI costlier than parking funds with it.
News about Repo Rate
The Reserve Bank of India Keeps Repo Rate at 5.5%
The Reserve Bank of India (RBI) maintains its repo rate unchanged at 5.5%. The RBI Governor, Sanjay Malhotra made the announcement on Wednesday. The RBI’s Monetary Policy Committee unanimously voted to keep the rates unchanged, at 5.5%. This move was made to evaluate the effects of recent rate cuts. The RBI has cut the policy repo rates by 100 basis points so far in 2025, as price pressures eased.
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