Why is reverse repo rate lower than the repo rate?
The Repo rate is the interest rate RBI charges on money borrowed by commercial banks. Repo rate helps RBI in controlling inflation.
The reverse repo rate is the interest rate on which RBI borrows money from banks. The reverse repo rate helps the RBI control the supply of money.
The reverse repo rate will always be lower than the repo rate because RBI cannot pay higher interest on deposits than charging interest on loans.
The Repo rate is higher than the reverse repo rate because it helps RBI with proper cash flow to banks. A rise in repo rate directly banks as they increase the interest rate which makes borrowing costlier. An increase in the repo rate makes the savings more attractive.
The current repo rate of RBI is 4.90%.
During high inflation in the economy, the RBI increases the reverse repo. It encourages the banks to lend more funds to the RBI to earn higher returns on excess funds.
The current reverse repo rate of RBI is 3.35%.
