Difference Between Repo Rate and Reverse Repo Rate - Repo Rate Vs Reverse Repo Rate
The main difference between Repo Rate and Reverse Repo Rate. When the banks need money to meet their day-to-day obligations, they approach RBI to borrow required money. Repo rate is a rate at which banks borrow money from RBI against the sale of government securities. Repo rate is an abbreviation of Repurchase Rate.
When the banks have some surplus funds but any lending or investment option is not available, they approach RBI to deposit such funds with it so that they can at least earn some interest on such funds. Reverse Repo rate is the rate at which banks park their short-term surplus liquidity with the RBI. In other terms, it is the rate offered by RBI when banks deposit their excess funds with the RBI for short term.
There are many differences between Repo Rate and Reverse Repo Rate which are listed in the following table:
Repo Rate Vs Reverse Repo Rate
| Basis of Difference | Repo Rate | Reverse Repo Rate | |
|---|---|---|---|
| Definition | Repo rate is a rate at which banks borrow money from RBI against the sale of government securities | Vs | Reverse Repo rate is the rate at which banks park their short-term surplus liquidity with the RBI |
| Purpose | To fulfill the deficiency of funds of the banks | Vs | It is a tool which is used by the RBI to absorb liquidity from the economy |
| Controlled by | Reserve Bank of India | Vs | Reserve Bank of India |
| Impact on Cost | Higher the repo rate means the cost of short-term money is very high which may slowdown the economic growth | Vs | Higher the reverse repo rate means higher the rate on deposits |
| Rate | Higher than Reverse Repo Rate | Vs | Lower than Repo Rate |
| Control | Repo Rate controls inflation in the economy | Vs | Reverse Repo Rate controls money supply in the economy |
| Higher Rate results into | Banks will borrow less from the RBI | Vs | Banks will keep more funds with the RBI |
| When the rate is hiked | When the RBI wants to discourage banks from borrowing funds | Vs | When the RBI falls short on money |