Reverse repo rate

Also called: Reverse repurchase agreement, reverse repo · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

The reverse repo rate is the interest rate the RBI pays banks when it takes surplus money out of the banking system. The RBI sells government securities to banks and agrees to buy them back on a fixed date at a fixed price.

• Why it matters: it sets the lowest return a bank can earn by parking spare cash with the RBI. That in turn puts a lower limit on short-term market interest rates.
• How it relates to repo: a reverse repo is the repo deal seen from the other side. In a repo, the RBI lends and adds money. In a reverse repo, the RBI borrows and takes money out.
• Status today: since April 2022, the fixed-rate reverse repo is no longer the floor of India's rate corridor. The Standing Deposit Facility (SDF) does that job now.

Explanation

How a reverse repo works

• Step 1: the RBI sells. The RBI sells government securities (G-secs) to a bank. The bank pays the RBI cash.

• That cash leaves the bank's hands, so liquidity (ready cash in the banking system) falls.

• Step 2: the RBI buys back. On the agreed date, the RBI buys the same securities back at a slightly higher price.

• The gap between the two prices is the bank's interest. The rate it works out to is the reverse repo rate.

• The deal reverses. Because of the buy-back, the money comes out of the system only for a short time.

• An OMO sale is different. It takes money out permanently, because there is no promise to buy the securities back.

What a change in the rate does

• Reverse repo rate raised (contractionary):
• banks earn more by parking spare cash with the RBI
• → they keep less money for lending to people and firms
• → rates in the call money market (where banks lend to each other overnight) move up

• → credit becomes costlier and the money supply falls.

• Reverse repo rate cut (expansionary):

• parking money with the RBI pays less
• → banks prefer to lend it out

• → market rates ease and credit grows.

• The corridor view: the floor rate keeps the weighted average call rate (WACR) from falling far below the repo rate. WACR is the average rate at which banks lend to each other overnight, and it is the RBI's operating target [4].

Its place in the LAF corridor

• The Liquidity Adjustment Facility (LAF) is the RBI's daily system for adding and taking out liquidity [2].
• The corridor is a band that keeps short-term rates close to the repo rate:
• Floor: where banks park surplus money. This was the reverse repo; since April 2022 it is the SDF = repo − 25 bps [4].
• Middle: the repo rate, which is the policy rate.

• Ceiling: the Marginal Standing Facility (MSF) = repo + 25 bps [4]. The MSF is emergency overnight borrowing for banks at a penal (higher) rate.

• Worked example: a bank parks ₹1,000 crore overnight with the RBI at today's floor rate. The SDF rate is 5.00% (August 2026) [2].

• Interest = 1,000 × 0.05 ÷ 365 ≈ ₹0.137 crore ≈ ₹13.7 lakh.
• A bank will not lend overnight to another bank for less than this, because it can earn this much safely from the RBI. That is why the floor works.

In India

• Who manages it: the Reserve Bank of India (RBI), set up in 1935, runs reverse repo operations through the LAF.
• Who sets the rates: the 6-member Monetary Policy Committee (MPC) sets the repo rate under RBI Act s.45ZB [4]. The floor and ceiling are fixed as a margin around the repo rate: ±25 bps [4].
• The 2022 change: in April 2022, the SDF replaced the fixed-rate reverse repo as the floor of the corridor.

• The NCERT Class 12 book is outdated here. It still shows the reverse repo as the floor.

• The corridor in August 2026 [2]:

Rate	Level
SDF (floor)	5.00%
Repo (policy rate)	5.25%
MSF / Bank rate (ceiling)	5.50%

• The corridor is 5.50 − 5.00 = 50 bps wide. (1 bp = 0.01 percentage point.)
• The MPC voted unanimously to keep the repo rate at 5.25% with a neutral stance in August 2026 [2]. So the floor stays at 5.00% [2].

Don't confuse with

• Repo rate: under repo, the RBI lends to banks and adds liquidity. Under reverse repo, the RBI borrows from banks and takes out liquidity. The repo rate (5.25%, August 2026) [2] is the policy rate. The reverse repo is not.
• Standing Deposit Facility (SDF): both take money out of the system. But in a reverse repo the RBI has to give the bank government securities as collateral (security for the deal), while the SDF needs no collateral. Since April 2022 the SDF, not the reverse repo, is the floor.
• OMO sale: this also takes money out, but permanently, because it is an outright sale with no buy-back. A reverse repo is temporary and reverses on the agreed date.
• CRR: this also locks up bank money, but it is compulsory and earns no interest under RBI Act s.42. A reverse repo is voluntary and pays interest to the bank.

Prelims Hooks

• Reverse repo = the RBI sells securities with an agreement to buy them back. It absorbs liquidity, and the RBI pays the interest.
• In the revision table, raising the reverse repo/SDF rate → more money absorbed → money supply falls.
• Trap: "The reverse repo rate is the floor of the LAF corridor". This is wrong today. Since April 2022 the floor is the SDF.
• Corridor, August 2026: SDF 5.00% < Repo 5.25% < MSF = Bank rate 5.50% [2]. Floor = repo − 25 bps. Ceiling = repo + 25 bps [4].
• The MPC sets only the repo rate. The floor and ceiling are fixed margins around it [4].
• The RBI's operating target is the WACR. It is not the reverse repo rate, and it is not the repo rate itself [4].

Mains Points

• Why the floor moved to the SDF: under a reverse repo, the RBI must hand over G-secs as collateral for every rupee it absorbs.
• When banks hold a large surplus, the RBI can run short of securities to give.

• The SDF needs no collateral, so the RBI can absorb any amount of surplus. This makes the floor more reliable and helps keep the WACR close to the repo rate [4].

• The floor and transmission: a high floor lets banks earn a safe return without lending.

• When the RBI cuts rates, it wants cheap money to reach borrowers. That is why the floor is cut along with the repo rate, for example during the 125 bps easing to 5.25% by December 2025.

• The CRR cut to 3% of NDTL (from 29 November 2025) [3] was a second tool to free funds for lending.

• A rule-based corridor: a narrow 50 bps band [2], tied to a repo rate that the MPC sets under an inflation target (CPI 4% ± 2%) [4], keeps short-term rates predictable. It also makes the RBI accountable, which links to GS-II (statutory bodies and their independence).

Related concepts

• Monetary policy
• Expansionary monetary policy
• Contractionary monetary policy
• Quantitative tools of monetary policy
• Cash Reserve Ratio
• Net Demand and Time Liabilities
• Statutory Liquidity Ratio
• Bank rate
• Open market operations
• Outright open market operations

Read more

• Monetary policy and its quantitative instruments