Tata Capital > Blog > Wealth Services > What are the repo rate and reverse repo rate?
21 August 2026
5 mins read
2436
Summary
The repo rate is the rate at which the RBI lends short-term funds to commercial banks, while the reverse repo rate helps absorb excess liquidity from the banking system. Changes in these rates can influence loan interest rates, EMIs, deposit returns and investment activity. The RBI uses these tools, along with other economic indicators, to manage inflation, liquidity and growth. Understanding their movement can help borrowers and investors make better financial decisions.
The repo rate is the rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which it accepts funds from them.
The repo rate and reverse repo rate are key concepts in banking and finance. The repo rate refers to the interest rate at which the central bank, the Reserve Bank of India, lends money to commercial banks, thereby impacting economic activity.
Conversely, the reverse repo rate is the interest rate at which the central bank borrows funds from commercial banks to manage market liquidity. These rates are vital tools the central bank uses to ensure economic stability.
In this article, we will explain the repo and reverse repo rates in detail and highlight the differences between them.
The ‘repo’ full form is ‘repurchasing option.’ This repo rate meaning refers to the rate at which commercial financial institutions can obtain last-minute funding from the RBI. In return, the RBI receives securities from these commercial institutions, including treasury bills, gold, or bonds.
Once the commercial institution has repaid its loan to the RBI, it has the option to repurchase these securities, hence, the term repurchasing option or repurchasing agreement.
The reverse repo rate meaning is the interest rate at which commercial banks lend money to the RBI. This monetary policy instrument is used to manage liquidity within the economy. When the RBI raises the reverse repo rate, it can withdraw excess liquidity from the banking system, helping reduce inflationary pressure.
The RBI repo rate has broadly moved lower over the past decade, falling from 7.5% in 2015 to 5.25% in 2026. It reached its lowest level of 4% in 2020 and 2021, before rising sharply during the tightening cycle that followed. The rate has since eased again, reaching 5.25% in 2026.
| Year | Repo Rate (%) |
| Apr 2026 | 5.25 |
| Dec 2025 | 5.25 |
| Aug 2025 | 5.5 |
| Jun 2025 | 5.5 |
| Apr 2025 | 6 |
| Feb 2025 | 6.25 |
| Dec 2024 | 6.5 |
| 2023–2024 | 6.5 |
| 2022 | 6.25 |
| 2021 | 4 |
| 2020 | 4 |
| 2019 | 5.15 |
| 2018 | 6.25 |
| 2017 | 6.25 |
| 2016 | 6.5 |
| 2015 | 7.5 |
Now that the repo rate and reverse repo rate are clear, let’s understand how they differ.
The table below clarifies repo rate vs reverse repo rate:
| Factors | Repo rate | Reverse repo rate |
| Purpose | To inject liquidity into the banking system and meet short-term fund requirements | To absorb excess liquidity from the banking system |
| Direction of Transaction | Money flows from RBI to commercial banks | Money flows from commercial banks to RBI |
| Lender | Reserve Bank of India | Commercial banks |
| Borrower | Commercial banks | Reserve Bank of India |
| Collateral | Banks provide government securities to RBI | RBI provides securities to banks |
| Impact of Higher Rate | Makes borrowing costlier for banks, leading to higher loan rates for consumers and reduced money supply | Encourages banks to park more funds with RBI, reducing lending and controlling inflation |
| Impact of Lower Rate | Makes borrowing cheaper, encouraging lending and spending, thereby boosting economic growth | Increases money supply as banks prefer lending over depositing with RBI |
| Effect on Inflation | Higher repo rate helps control inflation by reducing spending | Higher reverse repo rate helps control inflation by absorbing excess liquidity |
The Reserve Bank of India’s Monetary Policy Committee considers several factors before changing what is repo rate and reverse repo rates.
These include:
| Factor | Details |
| Inflation levels | Track price rises to keep inflation close to the 4% target with ±2% tolerance. |
| Economic growth | Review GDP growth, industrial activity, and employment conditions |
| Liquidity in the system | Check how much money is available in banks. |
| Global factors | Watch global interest rates, oil prices, currency movements, and capital flows. |
| Government finances | Consider government spending, borrowing, and budget position. |
| Supply-side conditions | Evaluate agricultural output, monsoon patterns, and supply chain issues. |
| Financial stability | Assess the health of banks, credit demand, and how well policy changes reach borrowers. |
When the repo rate increases, lenders face higher borrowing costs from the RBI, leading them to raise interest rates on various types of loans, such as home loans, personal loans, and car loans. This results in higher EMIs for borrowers with floating-rate loans.
Conversely, when the repo rate decreases, lenders reduce lending rates, lowering EMIs and making loans more affordable.
For savings, higher repo rates encourage banks to offer better returns on fixed deposits and savings accounts to attract deposits, benefiting savers. However, lower repo rates reduce interest earned on these savings products. An important thing to note is that fixed-rate loans remain unaffected until their fixed period ends, while floating-rate loans adjust directly based on repo rate changes.
Changes in the repo rate can influence FD interest rates, borrowing costs, investment and economic activity.
The repo rate and reverse repo rate are important tools used by the RBI to manage liquidity, inflation and economic growth. Changes in these rates can influence loan interest rates, EMIs, fixed deposit returns, investment and market sentiment. Understanding their differences and the factors behind rate changes can help borrowers and investors make better financial decisions.
The repo rate is the interest rate at which commercial banks borrow money from the RBI, while the reverse repo rate is the rate at which the RBI borrows money from commercial banks.
The full form of repo rate is Repurchase Agreement Rate or Repurchasing Option Rate. The reverse repo rate is simply called Reverse Repurchase Agreement Rate, representing the opposite transaction of the repo rate.
When the repo rate increases, lenders raise home loan interest rates, leading to higher EMIs for floating-rate borrowers. Conversely, repo rate cuts reduce lending rates, resulting in lower EMIs and more affordable borrowing costs.
RBI changes repo rate vs reverse repo rates to control inflation, manage liquidity, support economic growth, and ensure financial stability in the country by influencing borrowing, spending, and saving in the economy.
No. While repo and reverse repo rates often move together, RBI may change only one rate depending on liquidity conditions, inflation trends, and monetary policy objectives at that time.
When the repo rate increases, borrowing becomes expensive, so lenders lend less and people spend less, which helps slow down rising prices. When the reverse repo rate increases, banks prefer parking money with RBI instead of lending, reducing money circulation and curbing inflation.
No, not always. The repo rate and reverse repo rate serve different purposes, so their relationship can vary depending on the RBI’s monetary policy framework. Traditionally, the reverse repo rate has been lower than the repo rate, but the RBI can change either rate based on liquidity and economic conditions.
Previous Post
