Repo, Reverse Repo & Bank Rate
1 Quick Explanation 1–3 min
Repo rate is what RBI charges banks to borrow money short-term against securities.
Reverse repo is what RBI pays banks to park surplus funds with it. Bank rate is the long-term lending rate.
2 Detailed Notes
Definition
Definitions
- Repo Rate: the rate at which RBI lends short-term funds to commercial banks against government securities (collateral).
- Reverse Repo Rate: the rate at which RBI borrows from banks / pays them for parking surplus funds.
- Bank Rate: the rate at which RBI lends long-term funds to banks without any collateral (rediscounting of bills).
Comparison
Repo vs Bank rate
| Basis | Repo Rate | Bank Rate |
|---|---|---|
| Period | Short-term | Long-term |
| Collateral | Government securities | No collateral |
| Mechanism | Repurchase agreement | Rediscounting of bills |
| Current use | Main policy tool | Signal rate |
Key idea
How policy works
- RBI raises repo rate → borrowing costlier for banks → banks raise lending rates → demand for credit falls → money supply contracts → inflation cools.
- RBI cuts repo rate → borrowing cheaper → more loans → money supply expands → growth supported.
Important
Reverse repo logic
Reverse repo is always below repo. It gives banks a safe return to park excess cash, so it sets a floor on short-term rates and helps absorb excess liquidity.
Formula
Order to remember
Bank Rate > Repo Rate > Reverse Repo RateRBI borrows cheapest (reverse repo), lends short-term at repo, and long-term at bank rate.
In One Minute
Repo = short-term RBI lending to banks (collateral). Reverse repo = RBI paying banks to park funds. Bank rate = long-term, no collateral. Bank Rate > Repo > Reverse Repo.
Important for Exam
- ⭐ 1-mark: define repo rate / reverse repo rate.
- ⭐ 3-mark: 'What will RBI do if inflation is high?' — raise repo.
- ⭐ Effect of repo change on money supply (4 marks).
- ⭐ Bank rate vs repo rate table.
Watch & Learn
Watch on YouTubeCRR/SLR /Repo Rate/Bank Rate - Class 12 Economics Chapter 3 in Hindi - UP/Bihar Board
by Magnet Brains Hindi Medium
Why watch? All policy rates in one video with board examples.
Open on YouTube Watch on YouTubeCRR/SLR /Repo Rate/Bank Rate - Class 12 Economics Chapter 3 in Hindi - UP/Bihar Board
by Magnet Brains Hindi Medium
Why watch? Simple comparisons between all rates.
Open on YouTubeWhen a verified best video is available it plays right here; the button always opens the same video on YouTube. Topics without a verified pick fall back to a live YouTube search from trusted CBSE channels.
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