BharatNotes What is Repo vs Reverse Repo?
The repo rate (repurchase rate) is the interest rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks against the collateral of government securities, under a commitment to repurchase those securities. The reverse repo rate is the mirror operation: the rate at which the RBI borrows from banks, absorbing their surplus liquidity. In short, the repo injects liquidity into the banking system, while the reverse repo withdraws it.
Both are tools of the Liquidity Adjustment Facility (LAF) and are set by the six-member Monetary Policy Committee (MPC) within the flexible inflation-targeting framework (CPI target of 4%, with a +/- 2% band).
Key Differences
| Feature | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Direction | RBI lends to banks | RBI borrows from banks |
| Effect on liquidity | Injects (expansionary) | Absorbs (contractionary) |
| Collateral | Government securities | Government securities |
| Relative level | Higher | Lower than repo |
| Borrower / lender | Banks borrow | Banks lend (park funds) |
| Used to fight | Recession / slowdown | Excess liquidity / inflation |
Current Status (as of June 2026)
The MPC kept the repo rate unchanged at 5.25% at its June 2026 meeting — the third consecutive hold — while retaining a "neutral" stance (RBI MPC, June 2026). The repo rate had been cut by 25 bps from 5.50% to 5.25% at the February 2026 MPC.
The present policy corridor is:
| Rate | Level (June 2026) | Role |
|---|---|---|
| MSF / Bank Rate (ceiling) | 5.50% | Emergency overnight borrowing |
| Repo rate (centre) | 5.25% | Principal policy rate |
| SDF (floor) | 5.00% | Absorbs surplus liquidity (uncollateralised) |
| Fixed reverse repo | 3.35% | Retained but non-operational |
A crucial nuance: since the Standing Deposit Facility (SDF) was introduced on 8 April 2022, the SDF — not the reverse repo — acts as the floor of the LAF corridor. The SDF is uncollateralised (the RBI absorbs funds without giving securities in return), which removed the earlier constraint that the RBI needed enough eligible securities to mop up liquidity. The fixed reverse repo at 3.35% has been retained in the toolkit but is no longer the active absorption instrument.
Why It Matters
The repo rate is the anchor of monetary transmission: under the external benchmark lending rate (EBLR) regime, most floating-rate home, auto and MSME loans reprice directly with the repo rate, so MPC decisions reach borrowers quickly. A repo cut lowers EMIs and stimulates demand; a hike raises borrowing costs to cool inflation. The corridor (SDF floor to MSF ceiling, repo at centre) keeps the weighted average call money rate close to the policy rate.
UPSC Angle
For Prelims, remember the logic, not just the number: repo = RBI lends (rate is higher); reverse repo = RBI borrows (rate is lower). Do not confuse the reverse repo with the SDF, MSF or Bank Rate. For Mains GS3, connect these tools to inflation control, the growth-inflation trade-off, and the strength of monetary transmission. Cross-link with current affairs on Ujiyari.com for each MPC outcome, since the live rate is examinable.
