When we look at the terms “Reverse Repo Rate” and “Repo Rate” they seem to be identical terms with only one word difference between them. However this one word difference makes them the exact opposite of each other. These terms are an important part of the general awareness for bank exams. We, at IBPSExamAdda.org.in are here to provide you with the latest banking awareness 2015 along with banking awareness PDF download.
Coming back to the topic, let’s have a closer look at both these terms and try to understand the difference between them.
Banking Awareness: What Is Repo Rate and Reverse Repo Rate?
The first step towards understanding the difference between Repo Rate and Reverse Repo Rate would be to define both the terms.
Repo Rate is the rate at which the central bank of a country (RBI for India) which is an apex institution of the banking world, gives short term loan to the commercial banks when they (commercial banks) face shortage of funds. To know in detail about what Repo Rate means Click Here.
Reverse Repo Rate is the rate of interest that the commercial banks enjoy when they deposit their money with the central bank of a country (RBI in case of India). The term reverse means the opposite hence, Reverse Repo Rate can be looked upon as the opposite of Repo Rate as here the commercial banks receive interest whereas Repo Rate is a concept in which the commercial banks pay interest to the central bank.
Repo Rate is always greater? Why?
We very well know that every bank runs by giving loans at a higher rate of interest than the interest that is offered to the depositors on savings. This is the way by which the bank derives out profits for its functioning. The RBI or the central bank functions exactly in the same way, since it does not deal with the general public, its main source of income become the commercial banks. Maintaining the Repo rate higher than the Reverse Repo rate gives the RBI or central bank enough profits for its functioning.
When are Repo Rate and Reverse Repo Rate implemented?
You must have heard of the term “Inflation” it refers to the sudden rise in price of a commodity. Neither you nor me are fond of price hikes, who likes to spend more on their favorite products?
Repo Rate and Reverse Repo Rate act as important tools in order to control inflation. The Reserve Bank Of India, during inflation increases its Repo Rate in order to limit the money supply in the market. Once RBI increases Repo Rate, the commercial banks will not be willing to take loan from the RBI and hence they will increase their rate of interests on which loans are available to the general public. The money supply in the economy will thus decrease and inflation will be controlled.
Apart from increasing the Repo rate, another method to control inflation would be to increase the Reverse Repo Rate. Once the Reverse Repo Rate is increased, the commercial banks will be induced to deposit their money with the central bank or RBI. The more money commercial banks deposit with the RBI, the lesser money would be there in the market thereby controlling inflation.
The decrease in Repo Rate and Reverse Repo Rate will induce the commercial banks to borrow from the RBI which will lead to increased availability of cash in the economy and in the case of deflation, this acts as a powerful tool to help increase money supply in the economy.
Repo Rate and Reverse Repo Rate are thus implemented to control the money supply in the market. They are also responsible for maintaining the liquidity of funds in an economy and are really important concepts to understand when it comes to banking awareness.