Repo and reverse repo are tools used by the Reserve Bank of India to control money supply and liquidity in the country. In a repo transaction, banks borrow funds from RBI by selling government securities with an agreement to buy them back later. The reverse repo is the opposite, with RBI borrowing from banks. Repo rate is currently 7.25% while reverse repo is 1% lower at 6.25% to prevent risk-free arbitrage opportunities for banks. RBI uses adjustments to these rates to influence whether liquidity and money supply increases or decreases in order to control inflation.

1. REPO & REVERSE REPO

2. REPO
 Means of short-term borrowing.
 ‘Banks’ borrow from ‘RBI’
 Parks government securities and get funds in exchange.
 The rate at which the transactions take place is called ‘Repo Rate’
 Repo Rate today is 7.25%
 Unit is Basis points

3. This is what happens..

4. Reverse Repo
 Reverse Repurchase is just the reverse of Repo.
 ‘RBI’ borrows money from ‘banks’.
 Banks purchase government securities from RBI
 The rate at which the transactions take place is called ‘Reverse repo Rate’
 Todays Reverse repo rate is 6.25%
 Reverse Repo is always 100 basis points less than Repo.

5. How do Repo & Reverse repo work?
 Both repo & reverse repo control money supply in the country

6. Effects of Repo on Economy
Increase in Repo
 Less money is borrowed by banks from RBI
 Liquidity reduces
 Inflation is controlled
Decrease in Repo
 More money is borrowed
 Liquidity increases
 Inflation is not under control

7. Effects of Reverse Repo on Economy
Increase in Reverse Repo
 More incentives to banks, banks park more money in RBI
 Reduces liquidity
 Inflation is controlled
Decrease in Reverse Repo
 Banks keep the money to themselves
 Increase of money flow in market
 Inflation is uncontrollable

8. Who decides the Repo & Reverse repo
rates?
 The reserve bank of India decides the rates after studying the needs of the
market & future trends.
 Repo & Reverse repo rates are the most important tools in the hands of RBI to
control liquidity of money in the system

9. Why is Repo always greater than Reverse
Repo?
“Concept of ARBITRAGE”

10. Why is Repo always greater than Reverse
Repo?
Example:
 Lets assume Repo is 7% & reverse repo rate is 8%
 ABC bank has Rs.1,00,000 & parks it at RBI at 8% interest(Reverse Repo)
 ABC bank borrows exactly Rs.1,00,000 from RBI at a 7% interest(Repo)
 Hence,ABC bank earns 1% extra interest without any risk.
 This is called Arbitrage.

11. Thankyou!!