Repo Rate and Reverse Repo Rate

These are commonly used terms in banking sector. Let’s take an example to explain these things.


Suppose you want to start a business and to raise capital for your new business you went to a “Muneem”. Of course, He can’t give to money by simply looking at your face instead he has taken some security deposit like properties papers/jewelry then gave you some money with a particular interest rate. After some period of time, Mr Muneem came to know that your business is doing well so he decides to sell your security deposits (which you have given while raising capital) to you at a particular interest rate. Finally he sells you some of the securities and gets some of his money back. 


Before I explain further let me tell you something about Mr Muneem. He is a kind of person who is the head of all the people running their business in a particular area. He manages all the capital flow i.e lending money to the people who want to start business or want to improve their business. The extra ordinary thing he does is, when he finds that the flow of money in that area is adequate and further injection of money can cause instability in market, then he decides to tighten the money flow by selling the securities deposited by some of the business men. So he’ll lend money at a particular interest rate as per his choice and will take the money at a particular interest rate as per his choice.


Now all you need to do is, to correlate the entire scenario with RBI and all the commercial banks of our country. Imagine Mr Muneem as RBI and all the business men/ Newbie as commercial banks. The rate at which Mr Muneem lends and gets his money back is nothing but Repo Rate and Reverse repo Rate respectively. At least by now, you might have got some idea about the mechanism. 


So we can say, Repo and Reverse Repo are rates available in the hands of RBI to manage the liquidity or money flow into the system. It either injects liquidity into the market if the conditions are tight or sucks out liquidity if the liquidity is excess in the system through the Repo and Reverse Repo mechanism. Now in REPO rate RBI injects liquidity into the system i.e. it purchases the securities from the banks and lends money to them to ease their liquidity crunch. The rate charged by it for lending money is the REPO rate. Reverse REPO rate is the opposite of REPO: When liquidity is excess in the system. RBI sucks it out by Reverse REPO by lending securities and taking out money from banks. The rate charged for it is the Reverse Repo rate.


Note—Above rates are decided by central bank i.e RBI. 


You can easily get this (Rate) information at RBI home page right hand side under heading Current Rates
http://www.rbi.org.in/home.aspx