Reverse Repo Rate is the opposite of the repo rate. It is the interest rate at which the Reserve Bank of India borrows money from all other commercial banks for a short span of time when they have excess cash reserves. This is a tool used by the central bank when it feels there is excess money floating with the commercial banks. An increase in reverse repo rate is beneficial for the banks as they will get a higher percentage of interest. So commercial banks always prefer to lend their money to RBI instead of any other customer as it is less risky.
Impact of Reverse Repo Rate
On Banking System
Increased Reverse Repo Rate – When there is excess money floating in the banking system, RBI increases the Reverse Repo Rate so that banks can gain more interest on lending the money to RBI.
Reduction in Reverse Repo Rate – When there is a reduction in reverse repo rate, banks will not be profitable as they will not earn higher returns on this investment.
On end customers
Increased Reverse Repo Rate – Increased reverse repo rate helps customers by reducing the inflation rate. This happens when banks lend more money to RBI leaving fewer funds in the financial market. This reduction in the money supply helps in curbing the inflation rate.
Reduced Reverse Repo Rate – With reduced reverse repo rate the banks will not invest their money in lending the central bank. This results in a higher supply of money into the market. Hence, more money for fewer goods will lead to a rise in inflation, which is a significant concern for the common man.
On National Economy
The enhancement in the reverse repo rate is done with the primary objective to suck out excess money floating in the banking system to regulate the inflation rate. Recently, it has increased the reverse repo rate by 25 basis points and increased the earlier rate of 5.75 to 6%. With this increase in reverse repo rate, the money supply to the market will decrease, and hence the inflation rate will decrease.
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