One must have heard of Repo rate as term being widely used in newspapers and banks alike. Most of the banks have their loan interests rates linked to repo rates. This may not be the case with NBFCs though wherein they have their inbuilt benchmarks rates.

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Reverse Repo Rate

Reverse repo rate is the rate at which the Reserve Bank of India borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.