Sun. Jun 26th, 2022
repo and reverse repo rate

The cost of any loan, be it secured or unsecured, has several factors impacting it. While several are based on the financial profile of a borrower, some others are based on lender policies. Understanding aspects like what is repo and reverse repo rates can work in favor of making the right borrowing decision.

As crucial financial tools, repo and reverse repo rates contribute significantly to determining why and how the interest rate on an advance can vary from one period to another. Similarly, keeping track of the two can help gain an overall idea regarding financial control of India’s economy. 

Understanding the repo rate and reverse repo rate

The first step to better differentiating repo and reverse repo rate is to understand their meaning and scope of efficacy. Here’s a look. Before that, take a quick scan at who levies these rates and why.

  • Levy of repo and reverse repo rates

Just like a financial institution lends loans and advances to retail borrowers, the Reserve Bank of India, as a central bank, lends funds to all financial institutions in the country. Simultaneously, as the banker of all banks, the RBI also accepts deposits from these financial institutions, allowing them a significant source of earnings. Depending on the service provided, it levies these rates payable to and from RBI, defining repo and reverse repo rates.

  • Repo rate

It is the interest rate that the RBI charges commercial financial institutions as a cost on loans availed by them from this central bank. These funding options come with a repurchasing agreement and a predetermined period for such repurchase. The repo rate levy, which is currently levied at 4%, allows the RBI to implement liquidity control and regulate the financial market remarkably.

  • Reverse Repo rate

As against the repo rate, the reverse repo rate is the interest rate at which the RBI accepts deposits from commercial financial institutions. These financiers can thus utilize any surplus funds to earn interest through a deposit with the RBI. The reverse repo rate that RBI determines is another crucial financial tool that helps exercise liquidity control in the market. It is currently running at 3.35%.

With this understanding of repo rate  and reverse repo rates, let’s check out the essential points of difference that set them apart.

Differences between repo and reverse repo rates

  1. Repo is the rate at which the RBI collects interest against loans extended to commercial lenders. The reverse repo refers to the rate at which these lenders earn interest against RBI deposits.
  2. Repo is always set at a higher rate than Reverse Repo.
  3. A change in the repo rate helps control economic inflation, while a difference in the latter controls the money supply to the economy.
  4. The former is used to regulate and meet any funding deficiency in the economy, while the latter helps improve liquidity.
  5. An increase in the repo rate can mean costlier loans from retail borrowers as it is the basis of commercial lending rates. Contrarily, an increase in reverse repo would mean restricted earning through RBI deposits, persuading commercial lenders to extend loans and advances to the retail market for earning.
  6. A reduction in the former promotes higher retail borrowing as retail loans become cheaper. The RBI aims to bring new deposits from the market by reducing the latter, thus restricting monetary flow.

As per the link of repo rate with loans and advances, it directly impacts the lending-borrowing market. With the repo rate being one of the historic lowest today, availing of even unsecured advances like personal loans has become cheaper. 

Several reputed financial institutions today provide these loans at competitive rates of interest so you can avail better interest rates for your personal loan or any other advance. Such a cost-friendly personal loan not only helps you fulfill all your wishes but also helps you pay affordable EMIs.

Existing customers of some lending institutions can look forward to knowing all about pre-approved personal loans, which come with perks like instant approval and attractive rates. Lenders like Bajaj Finserv simplify financing worries of borrowers like how to apply for a personal loan with their online application processes. Further, you can check your Bajaj Finserv loan application status at any given time.

The lender brings pre-approved offers to make financing of financial products like personal loans, credit cards, and business loans quick and convenient. You would need only your essential contact details to check your pre-approved offer. When planning to meet your big-ticket financing needs with loans and advances, it is best to keep track of rate changes from the RBI in the long run. Knowing repo and reverse repo rate and their changes should help you time your borrowing suitably for maximum affordability.

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