Reverse repo rate is a term used in the banking and financial sector. It is related to the monetary policy of a country, which is the way the central bank manages the money supply and interest rates in the economy.
Reverse repo rate is the opposite of repo rate. It is the interest rate which the central bank of the country pays on the deposits from commercial banks. Commercial banks will usually deposit money with central bank in case they have excess money. The central bank can absorb liquidity from the banking system and control inflation and money supply.
For example, suppose the reverse repo rate in India is 5.5%. This means that if a commercial bank has excess funds of Rs. 100 crore, it can deposit them with the RBI and earn an interest of 5.5% per annum for the deposited amount. The commercial bank will get back Rs. 100 crore plus interest from the RBI and return its government securities.
The reverse repo rate is always lower than the repo rate.The difference between the repo rate and the reverse repo rate is called the repo-reverse repo spread or corridor.
The reverse repo rate is an important tool for monetary policy because it influences the lending and borrowing behavior of commercial banks and affects the money supply and interest rates in the economy. By changing the reverse repo rate, the central bank can either encourage or discourage commercial banks from parking their surplus funds with it.
When the central bank increases the reverse repo rate, it means that it is willing to pay more interest to commercial banks for their excess funds. This makes it attractive for commercial banks to deposit their money with the central bank rather than lending it to other borrowers or investing it in other assets. This reduces the availability of credit in the market and increases its cost. This also reduces the money supply and inflation in the economy.
When the central bank decreases the reverse repo rate, it means that it is willing to pay less interest to commercial banks for their excess funds. This makes it unattractive for commercial banks to deposit their money with the central bank rather than lending it to other borrowers or investing it in other assets. This increases the availability of credit in the market and decreases its cost. This also increases the money supply and inflation in the economy.
The reverse repo rate affects various sectors of the economy such as industry, agriculture, trade, services, etc., because they depend on credit for their operations and expansion. The reverse repo rate also affects consumers because they borrow money for various purposes such as buying a house, a car, education, etc.
The reverse repo rate also affects other financial markets such as bond market, stock market, foreign exchange market, etc., because they are influenced by interest rates and liquidity conditions.
The reverse repo rate is decided by a committee of experts called Monetary Policy Committee (MPC) in India, which meets every two months and announces its decision after considering various economic indicators such as GDP growth, inflation, fiscal deficit, current account deficit, etc.
The current reverse repo rate in India as of July 2023 is 3.35%