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Reverse repo rate: meaning and its place after the SDF
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The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks for a short period, handing over government securities as collateral. It is the mirror image of the repo rate. In a repo the RBI is the lender; in a reverse repo the RBI is the borrower. When the banking system has surplus cash, banks park it with the RBI and earn this rate.
How it works
A bank with idle money buys government securities from the RBI and the RBI promises to buy them back the next day at a higher price. For that period the cash sits with the RBI instead of being lent to customers, so liquidity in the system shrinks. A higher reverse repo rate makes parking funds more attractive and drains more cash; a lower rate pushes banks to lend instead.
A memory hook: repo, the RBI lends; reverse repo, the RBI borrows.
Why the SDF took over the floor
Until April 2022 the fixed-rate reverse repo was the floor of the liquidity corridor. It had a practical limit: the RBI must hand over securities as collateral, and with very large surpluses it can run short of them. The standing deposit facility lets the RBI absorb funds without giving collateral, and from 8 April 2022 it became the floor. The RBI kept a fixed-rate reverse repo window at its own discretion, along with variable-rate reverse repo auctions for longer absorption. The mechanics are covered under the liquidity adjustment facility.
Repo came to India in December 1992 and reverse repo in November 1996.
How bank exams ask about it
Classic stems: "the rate at which RBI borrows from banks", "an increase in reverse repo rate will...", and "which rate is lower, repo or reverse repo". Newer papers ask "what is the floor of the LAF corridor", where the answer is the SDF and not the reverse repo. Read the option list carefully, then place the term in the wider banking awareness syllabus.
Where to find the current figure
The RBI publishes any reverse repo window rate with each policy announcement at rbi.org.in. Check there instead of relying on a number from an older guide.
Frequently asked questions
Is the reverse repo rate higher or lower than the repo rate?
Lower. Banks earn less when parking money with the RBI than they pay to borrow from it.
Does raising the reverse repo rate reduce inflation?
It tends to, because banks keep more money with the RBI and have less to lend, which cools credit growth.
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- Repo rateRepo rate is the rate at which the RBI lends short-term money to banks against government securities. How it works, what a change does and how exams ask it.
- Standing deposit facilityThe standing deposit facility lets banks park surplus funds with the RBI without collateral and sets the floor of the rate corridor. Meaning and exam facts.
- Liquidity adjustment facilityThe liquidity adjustment facility is the RBI's daily window for injecting or absorbing cash. Meaning, repo, SDF and MSF corridor, history and exam questions.
- Open market operationsOpen market operations are the RBI buying or selling government securities to add or drain cash. Meaning, OMO vs LAF, Operation Twist and exam facts.
- Cash reserve ratioCRR is the share of deposits that banks must keep with the RBI in cash. Meaning, legal basis, worked example, how it controls money supply and exam questions.
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