Repo Rate vs Reverse Repo Rate 2025

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 6 June 2025, the Reserve Bank of India (RBI) announced a substantial 50 basis points (bps) cut in the benchmark repo rate, bringing it down to 5.50%. This was the third consecutive rate reduction by the Monetary Policy Committee (MPC) in the year 2025. The move was aimed at promoting loan access for consumers. 

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.

How Does Repo Rate Work? 

Here are the details of how does repo rate work: 

1. To restrict the flow of money in the market, the Indian central bank uses the repo rate 
2. The repo rate is increased by the RBI when market is impacted by the inflation 
3. 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: 

1. Impacts the EMIs and interest of loans, such as Business Loans, Home Loans, Personal Loans, Car Loans, etc. 
2. 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:

1. A high repo rate helps drain excess liquidity from the market, whereas a high reverse repo rate helps inject liquidity into the economic system.
2. The repo rate is always higher than the reverse repo rate.
3. 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: 

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 in controlling it.  By lowering the cost of borrowing for borrowers, an increase 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: 

1. 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. 
2. 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. 
3.  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. 
4. 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. 

1. 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. 

Similarities 

Repo rates as well as repo 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: 

1. 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. 
2. Loans are given at bank rate for longer tenure. On the other hand, loans are given at repo rate for a shorter time period. 
3. 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. 

1. 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.