logo
Home Loans
Calculators
Resources
Partner with Us
Find Properties
Free Credit Report
Home > Home Loan > Learn > What is Reverse Repo Rate?

What is Reverse Repo Rate?

January 9, 2025
Table of Contents

Behind the scenes of every thriving economy lies a suite of tools used by central banks to keep things running smoothly. One such tool is the reverse repo rate—a key player in managing liquidity and steering economic growth. If you’ve ever been curious about how central banks influence interest rates and inflation, you’re in the right place. Let’s uncover the essentials of the reverse repo rate and its significance in maintaining economic stability.

Reverse Repo Rate Meaning

The Reverse Repo Rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks within the country. Essentially, it is the rate offered by the RBI to commercial banks for depositing their excess funds with the central bank. This mechanism helps the RBI manage liquidity in the banking system and control inflation.

Read more: Repo Rate vs. Home Loan Rates

How Does Reverse Repo Rate Work?

The Reverse Repo Rate is like a savings plan between banks and the Reserve Bank of India (RBI), which acts like the “main bank” for all other banks. Here’s how it works:

When banks have extra money that they’re not using, they can give it to the RBI for safekeeping. In return, the RBI promises to pay them a small amount of interest. This rate of interest is called the Reverse Repo Rate.

Think of it like this: if you had extra money and gave it to your parents to keep safe, and they gave you a little extra money (interest) as a thank you for letting them hold it, that’s similar to what banks do with the RBI.

The Reverse Repo Rate helps the RBI control how much money is available in the economy. If the rate is high, banks prefer to park their money with the RBI rather than lending it to people or businesses. If it’s low, banks are more likely to lend their money out instead of saving it.

How is Reverse Repo Rate Calculated?

The Reverse Repo Rate is determined based on the following factors:

  1. Inflation Targets: The central bank adjusts the rate to manage inflation. A higher reverse repo rate helps control inflation by reducing the money supply.
  2. Economic Growth: The economic outlook, including growth and employment levels, influences the rate. Strong growth may lead to a higher rate to prevent economic overheating.
  3. Market Liquidity: The central bank evaluates liquidity in the banking system. Excess liquidity may result in a higher rate to encourage banks to park surplus funds with the RBI.
  4. Monetary Policy Committee (MPC) Decisions: The rate is set during MPC meetings, based on an analysis of economic indicators to align with broader economic objectives.

Implications of Changes in Reverse Repo Rate

The reverse repo rate is the rate at which the central bank borrows money from commercial banks. Changes in this rate have the following implications:

Implications of Changes in Reverse Repo Rate

AspectIncrease in Reverse Repo RateDecrease in Reverse Repo Rate
Liquidity in Banking SystemBanks park more funds with the central bank, reducing liquidity in the economy.Banks lend more, increasing liquidity in the economy.
InflationControls inflation by reducing liquidity.Boosts liquidity, encouraging spending and demand.
Interest RatesLending rates rise, making borrowing costlier.Lending rates fall, making borrowing cheaper.
Investment and GrowthSlows investments due to higher borrowing costs.Encourages investment and economic activity.
Government BorrowingRaises borrowing costs for the government.Lowers borrowing costs for the government.
Financial MarketsBoosts fixed-income returns, reducing equity investments.Encourages equity investments due to lower fixed-income returns.
Monetary Policy SignalIndicates a focus on controlling inflation.Signals an accommodative policy to boost growth.

Read More: RLLR vs. MCLR vs. PLR

Impact of Changes in Reverse Repo Rates on Loans

Changes in the reverse repo rate directly influence the cost and availability of loans as part of monetary policy. Here’s the impact:

AspectIncrease in Reverse Repo RateDecrease in Reverse Repo Rate
Loan Interest RatesHigher interest rates as banks prefer depositing funds with the central bank due to higher returns.Lower interest rates as banks are less inclined to park funds with the central bank.
Loan AvailabilityReduced availability as lower liquidity limits lending, especially to high-risk borrowers.Increased availability due to higher liquidity, encouraging banks to offer more loans.
Borrowing and Economic ActivitySlower borrowing as higher costs discourage loans for businesses and individuals, slowing investments and consumption.Boost in borrowing due to cheaper loans, supporting investments and consumer spending.

Impact of Reverse Repo Rate on Home Loans

AspectHigher Reverse Repo RateLower Reverse Repo Rate
Liquidity ControlBanks park more funds with RBI, reducing market liquidity, leading to higher home loan rates.Banks lend more, increasing market liquidity, resulting in lower home loan rates.
Influence on Lending RatesBanks raise lending rates, increasing the cost of home loans.Banks reduce lending rates, making home loans cheaper.
Home Loan EMIsHigher MCLR/RLLR leads to increased EMIs.Lower MCLR/RLLR results in reduced EMIs.
Borrower SentimentCostlier loans lead to negative borrower sentiment.Cheaper loans foster positive borrower sentiment.

Current Reverse Repo Rate 2025

The current reverse repo rate stands unchanged at 3.35%.

Repo Rate vs. Reverse Repo Rate

AspectRepo RateReverse Repo Rate
DefinitionThe interest rate at which the central bank lends funds to commercial banks.The interest rate at which the central bank borrows funds from commercial banks.
Direction of Money FlowMoney flows from the central bank to commercial banks.Money flows from commercial banks to the central bank.
Primary PurposeInjecting liquidity into the banking system.Absorbing excess liquidity from the banking system.
Effect on LiquidityA higher repo rate makes borrowing costlier for banks, reducing liquidity in the economy. A lower repo rate makes borrowing cheaper, increasing liquidity.A higher reverse repo rate encourages banks to park funds with the central bank, reducing liquidity. A lower reverse repo rate discourages this, increasing liquidity.
Impact on Interest RatesWhen the repo rate is increased, banks’ borrowing costs rise, possibly increasing lending rates for consumers. When it is decreased, lending rates may fall.When the reverse repo rate is increased, banks are incentivized to deposit funds, potentially leading to higher lending rates. When it is decreased, banks lend more freely, possibly lowering lending rates.
Control of InflationRaising the repo rate can help control inflation by making credit more expensive and slowing spending.Raising the reverse repo rate also helps control inflation by reducing liquidity in the market.
Monetary Policy StanceAn increase in repo rate signals a tightening policy to control inflation. A decrease signals a more accommodative stance to encourage growth.An increase in reverse repo rate also indicates a focus on reducing liquidity to contain inflation. A decrease suggests an intent to boost liquidity and economic activity.

Conclusion

The reverse repo rate is a pivotal monetary policy tool that helps maintain economic stability by managing liquidity, controlling inflation, and guiding interest rates. Its fluctuations influence borrowing costs for businesses and individuals, including home loan rates, which in turn affect overall economic activity.

Frequently Asked Questions

What is the reverse repo rate?

It’s the interest rate at which the central bank borrows funds from commercial banks, helping manage liquidity in the economy.

How does the reverse repo rate affect home loan interest rates?

A higher reverse repo rate can lead to higher home loan rates due to reduced liquidity. A lower rate generally results in lower home loan interest rates.

What happens when the reverse repo rate is increased?

Banks tend to park more funds with the central bank, reducing liquidity in the market, which can raise loan interest rates and slow economic activity.

Is the reverse repo rate the same as the repo rate?

No. The repo rate is the rate at which the central bank lends to commercial banks, while the reverse repo rate is the rate at which it borrows from them.

How does the reverse repo rate affect home loan interest rates?

A higher reverse repo rate can lead to higher home loan rates due to reduced liquidity. A lower rate generally results in lower home loan interest rates.

Compare Home Loans
from Top Banks

HDFC Home LoanHDFC Home Loan
VS
SBI Home LoanSBI Home Loan
credit dharma home loan
credit dharma referral
  • Compare Popular Banks
  • HDFC vs SBI Home Loan
  • HDFC vs ICICI Bank Home Loan
  • Tata Capital vs HDFC Home Loan
  • SBI vs ICICI Bank Home Loan
  • HDFC vs Kotak Mahindra Home Loan
  • Bank of Baroda vs SBI Home Loan
  • HDFC vs Axis Bank Home Loan
  • SBI vs IDBI Home Loan
  • Recent Posts
  • Bajaj Housing Finance Home Loan Processing Fees and Other Charges
  • Bajaj Housing Finance Home Loan Pre Payment Calculator
  • What is the CIBIL Score Required for Bank of India Home Loan Approval?
  • HDFC Bank Home Loan Interest Rates 2025
  • SBI Pradhan Mantri Awas Yojana – Urban 2.0
  • Related Posts
  • Affordable Housing Options in Mumbai for First-Time Home Buyers
  • A Revised Look at Home Loan Co-Borrowers in 2024
  • A Comprehensive Guide To Government Employee Home Loan Programs
  • Types of Interest Rates: Fixed, Floating, or Hybrid
  • 2024 Guide to Home Loan Interest Rates
  • Stamp Duty and Registration Charges in Goa 2025
  • Stamp Duty and Registration Charges in Chhattisgarh 2025
logologo
Fast. Transparent. Spam Free.
Getting a home loan in India is none of the above.
At Creditdharma we are changing that and making your home buying journey stress free. Top Experts, Best Banking Partners and Super Easy Process.
Quick Links
Blogs
Home Loan Eligibility
Balance Transfer
Calculators
About Us
Partner with Us
Become an Advisor
Properties
Glossary
IFSC Code Search
Refer & Earn
Free Credit Report
Home Loan Score
Help
Sitemap
Get in Touch
Enzyme Office Spaces , 27th Main, 480/B, 18th Cross Road, HSR Layout, Bengaluru, Karnataka 560102
linkedininstatwt/x
General Enquiry
contact@creditdharma.in

Home Loans From Top Banks

SBI

SBI Home LoansSBI Home Loan EMI CalculatorSBI Home Loan Eligibility CalculatorSBI MaxGain Home LoansSBI Privilege Home LoanSBI Home Loan StatementSBI Home Loan Customer Care

HDFC

HDFC Home LoansHDFC Home Loan EMI CalculatorHDFC Home Loan Eligibility CalculatorHDFC Loan Against PropertyHDFC Home Loan with Overdraft FacilityHDFC Home Loan StatementHDFC Home Loan Customer Care

LIC Housing Finance

LIC Housing Finance Home LoansLIC Home Loan EMI CalculatorLIC Home Loan Eligibility CalculatorLIC Plot Loan DetailsLIC Home Loan StatementLIC Home Loan Customer Care

Bank of Baroda

Bank of Baroda Home LoansBank of Baroda Home Loan EMI CalculatorBank of Baroda Home Loan Eligibility CalculatorBank of Baroda Loan Against PropertyBank of Baroda Home Loan StatementBank of Baroda Home Loan Customer Care

IDBI Bank

IDBI Bank Home LoansIDBI Bank Home Loan EMI CalculatorIDBI Bank Home Loan Eligibility CalculatorIDBI Bank Home Loan Interest RatesIDBI Bank Home Loan StatementIDBI Bank Home Loan Customer Care

ICICI Bank

ICICI Bank Home LoansICICI Bank Home Loan EMI CalculatorICICI Bank Home Loan Eligibility CalculatorICICI Bank Home Loan Top-UpICICI Bank Home Loan StatementICICI Bank Home Loan Customer Care

AXIS Bank

AXIS Bank Home LoansAXIS Bank Home Loan EMI CalculatorAXIS Bank Home Loan Eligibility CalculatorAXIS Bank Loan Against PropertyAXIS Bank Home Loan StatementAXIS Bank Home Loan Customer Care

BAJAJ Housing Finance

BAJAJ Housing Finance Home LoansBAJAJ Housing Finance Home Loan EMI CalculatorBAJAJ Housing Finance Home Loan Eligibility CalculatorBAJAJ Housing Finance Sambhav Home LoanBAJAJ Housing Finance Home Loan StatementBAJAJ Housing Finance Home Loan Customer Care

Resources

Best Home Loans in Your City

Home Loans in BangaloreHome Loans in HyderabadHome Loans in MumbaiHome Loans in DelhiHome Loans in ChennaiHome Loans in JaipurHome Loans in Pune

Home Loans by Amount

Home Loan for 40 LakhsHome Loan for 45 LakhsHome Loan for 50 LakhsHome Loan for 55 LakhsHome Loan for 60 LakhsHome Loan for 65 LakhsHome Loan for 70 Lakhs

Home Loans by Salary

Home Loan for 40,000 SalaryHome Loan for 50,000 SalaryHome Loan for 60,000 SalaryHome Loan for 70,000 SalaryHome Loan for 80,000 SalaryHome Loan for 90,000 SalaryHome Loan for 1 Lakh Salary

Trending Home Loan Options

Home Loans for Salaried IndividualsHome Loans for Business OwnersPlot cum Construction LoansLoan Against Property DetailsHome Loan Top-Up DetailsHome Loan for NRIsHome Loan Without ITR Documents

Tools

Home Loan EMI CalculatorHome Loan Balance Transfer CalculatorCompare Home LoansHome Loan Eligibility CalculatorBuy vs Rent CalculatorFind Branch Details with IFSC CodeHome Loan Tax Benefits CalculatorFOIR CalculatorCheck Your Credit ScoreHome Loan Prepayment CalculatorHome Loan Insurance CalculatorProperty Budget CalculatorHome Loan with Overdraft CalculatorCapital Tax Gains CalculatorExplore CD Approved PropertiesPlot Loan EMI CalculatorRental Yield CalculatorHome Loan Downpayment Calculator30-30-30-10 Calculator

Compare Home Loans

HDFC vs SBI Home LoansHDFC vs ICICI Home LoansHDFC vs BAJAJ Housing FinanceSBI vs AXIS Home LoansBank Of India vs SBIBank of Baroda vs AXIS BankHDFC vs Bank of BarodaSBI vs IIFL Housing FinanceSBI vs ICICI BankSBI vs BAJAJ Housing FinanceAXIS Bank vs ICICILIC vs SBI Home Loans

Best Home Loan Offers

Best Banks for a Home Loan Balance TransferBest NBFCs for a Home LoanBest Small Finance Banks for Home LoansBest Housing Finance CompaniesBest Public Sector BanksBest Options for Independent Properties
© Copyright Tres Commas Technologies Pvt. Ltd.
CIN : U72900KA2021PTC143997
Privacy Policy | Terms & Conditions
Disclaimer : The information contained in this website is presented purely for information purposes only provided as service to the internet community at large. It does not constitute insurance advice and we do not guarantee the accuracy, adequacy or the completeness of the information contained here.
Loading...