Repo Rate and Reverse Repo Rate

Repurchase Agreement(REPO Rate): It is the interest rate that central bank controls is called Repo Rate. It is the interest at which commercial banks can borrow from RBI up to a certain limit. This type of transaction is a collateralized transaction. In other words if the bank wants to borrow from RBI, it gives to the RBI a govt’s security. After certain period of time it purchases that same security at lower price. The difference in price is implicit interest rate which is termed as Repo Rate. Technically it is the rate at which liquidity is provided.

Reverse Repo Rate is the rate at which banks could lend to RBI.

Currently RBI sets only Repo Rate and RRR will be 100 basis points (1% less) less than the repo rate. RRR sets the floor for interest rates in the economy. (it means I cannot lend at less than RRR rate)

In between RR and RRR is Marginal Spending Facility Rate, this is 1% above RR and it is non collateralized transaction. Through this RBI has created a corridor for interest rates so that it will fluctuate within these boundaries.

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