Reverse Repo Rate

The reverse repo rate is the mirror image of the repo rate within India's liquidity adjustment facility (LAF). When commercial banks hold surplus funds they cannot deploy profitably in the short term, they park them with the RBI overnight under the reverse repo arrangement. The RBI pays the reverse repo rate on these deposits, which historically was set 25 basis points below the repo rate, making it less attractive than lending to businesses but safer than leaving funds undeployed.

The gap between the repo and reverse repo rates defines the LAF corridor. When liquidity in the banking system is in deficit, the operative rate tends to cluster near the repo rate as banks borrow from the RBI. When the system is in surplus — as was the case for much of 2020–21 following large government expenditure and RBI asset purchases — the operative rate gravitates toward the reverse repo rate. This distinction matters because it means the effective monetary policy stance can differ from the headline repo rate depending on system-wide liquidity conditions.

In April 2022, the RBI introduced the standing deposit facility (SDF) at a rate 25 basis points above the reverse repo rate to absorb excess liquidity without providing collateral. The SDF effectively replaced the reverse repo as the floor of the LAF corridor, while the reverse repo rate was retained but rendered less prominent in day-to-day operations. This structural shift allowed the RBI to drain liquidity more efficiently while retaining the flexibility of collateralised reverse repo transactions.

For retail depositors and savers, the reverse repo rate has indirect significance. When the RBI holds the reverse repo rate low to keep banking system liquidity ample, banks face pressure on net interest margins, which may limit their ability to raise deposit rates. Conversely, a rising reverse repo rate signals a tightening stance, which can translate into higher savings and fixed deposit rates over time as banks compete for funds.

A common misconception is that the reverse repo rate directly determines savings account interest rates. Banks set their liability rates based on broader funding costs, competitive dynamics, and their own asset-liability management needs. The reverse repo rate provides a lower bound on where banks might otherwise park funds, but the relationship to retail deposit rates is indirect and lagged rather than mechanical.