Difference Between Repo Rate and Reverse Repo Rate

Did you know why interest rates change? It usually happens due to two key tools RBI uses- the repo rate and the reverse repo rate. These rates serve as the deciding factor for how much banks lend, how expensive loans become, and how money moves through the economy.
While the repo rate controls how banks borrow money, the reverse repo rate affects where banks park surplus funds. 
So, if you are planning to apply for a loan, you first need to understand the difference between repo rate and reverse repo rate to follow inflation trends and overall economic signals. Plus, this will help you make informed choices when it comes to loan interest rates.
Let's break down repo rate vs reverse repo rate and how it affects monetary policies and borrowing choices.

What Is Repo Rate?

The repo rate (Repurchase Agreement Rate) is the interest rate at which the Reserve Bank of India (RBI)  lends money to commercial banks against government securities.
Here is how the repo rate works-
When banks run short of money, they borrow it from the RBI for a short time, keeping government securities as a guarantee. The repo rate is the interest the RBI charges banks for this borrowing.
•    Higher repo rate → borrowing becomes costly for banks
•    Lower repo rate → borrowing becomes cheaper for banks
Banks pass this cost on to customers.
•    Costly borrowing → higher loan interest rates
•    Cheaper borrowing → lower loan interest rates
As of the latest update in December 2025, India's Repo Rate is 5.25%.

What Is the Reverse Repo Rate?

The Reverse Repo Rate refers to the interest rate at which the RBI borrows money from banks. It is utilised as a tool primarily to remove excess liquidity from the system. This helps control inflation and maintain economic stability.
Here is how the reverse repo rate works-
•    When the reverse repo rate increases, banks start to deposit their excess funds with the RBI
•    The result? Low inflation as the money supply remains limited in the economy
•    But when the reverse repo rate decreases, banks lend more to businesses and individuals to give a boost to the economy.
As of the latest update in December 2025, India's reverse Repo Rate is 3.35%.

Key Differences Between Repo Rate and Reverse Repo
 

Impact of Repo and Reverse Repo Rate on Financial Products and Borrowers

The repo rate and reverse repo rate are key tools used by the RBI to influence borrowing, spending, and saving in the economy. 
•    Raising the repo rate means that banks will have to pay more to borrow money. The cost of a loan, as mentioned above, can be pushed higher in order to protect the margin.
•    Likewise, when the reverse repo rate rises, banks earn more by keeping excess funds with the RBI. As a result, banks may reduce lending, leading to tighter liquidity and higher interest rates.

Impact on Key Financial Products

Home Loans

●    An increase in repo rate usually leads to higher EMIs or longer loan tenures.
●    Floating-rate home loans are especially sensitive.
●    When repo rates fall, borrowers may enjoy lower EMIs, making home buying more affordable.

Auto & Business Loans

●    Higher repo rates increase borrowing costs, often slowing vehicle purchases and business expansion.
●    MSMEs feel the impact quickly due to dependence on bank credit.

How Borrowers Are Affected

Borrowers benefit when:
●    Repo rates are reduced → cheaper loans and lower EMIs
●    Liquidity improves → easier loan approvals
Borrowers face challenges when:
●    Repo rates rise → higher interest burden
●    Reverse repo rates rise → banks become cautious about lending
Also Read: How Does Repo Rate Impact Personal Loan?

How Does RBI Use Repo and Reverse Repo Rates in Monetary Policy?

Repo rate helps to improve liquidity and enhance growth; however, the reverse repo rate is used to absorb excess liquidity and reduce inflation. 
Hence, when controlling inflation, the RBI raises the repo rate when inflation increases, making borrowing from banks more expensive.
The RBI also raises the reverse repo rate by the methodology so that banks will profit more by parking excess funds with the RBI than by lending.

Managing Liquidity

•    During economic slowdowns, the RBI cuts the repo rate, lowering interest rates.
•    When there is excess liquidity, the RBI uses a higher reverse repo rate to absorb surplus funds from banks.

Also Read: What is the Difference Between Fixed and Variable Loan Interest Rate? 

Master Repo/Reverse Repo Rate Working to Borrow Smarter

Since banks follow the repo rate and reverse repo rate while setting their own rates, any changes in it usually show up in the interest you pay and the EMI you end up with.
Keeping track of how these rates change can help you make smarter choices and keep your monthly payments under control.
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Frequently Asked Questions

How to calculate the repo rate?

You can calculate repo rate using the following formula-
Repo Rate = [(Repurchase Price - Original Selling Price) / Original Selling Price] * (360 / n).
Where, Repurchase Price → Original Selling Price + Interest.
Original Selling Price → Sales Price of Security. 
n → Number of Days to Maturity.

Can the reverse repo rate be higher than the repo rate?

No, the repo rate (RBI lending to banks) is always higher because it's the cost for banks to borrow, while the reverse repo (RBI borrowing from banks) is lower to encourage banks to lend to the economy.

Why do repo and reverse repo rates change frequently?

Repo and reverse repo rates change frequently because they are the central bank's primary tools to steer the economy by managing money supply, controlling inflation, and encouraging growth.