Reverse Repo Rate is a key monetary policy tool used by the Reserve Bank of India (RBI) to manage liquidity in the economy. It refers to the rate at which the RBI borrows money from commercial banks for a short duration. By doing so, the RBI absorbs excess liquidity from the banking system and helps maintain financial stability.

In simpler terms, when banks have surplus funds, they park them with the RBI and earn interest at the reverse repo rate. This mechanism encourages banks to lend money to the RBI instead of lending excessively in the market, thus controlling inflation and liquidity levels. An increase in the reverse repo rate makes it more attractive for banks to deposit funds with the RBI, while a decrease encourages more lending in the market.

The Monetary Policy Committee (MPC) of the RBI reviews and adjusts the reverse repo rate periodically along with the repo rate. The relationship between the two rates is crucial: the reverse repo rate is always lower than the repo rate, creating a corridor for liquidity management. For instance, when inflation rises, the RBI may raise both repo and reverse repo rates to reduce the money supply.

Understanding the reverse repo rate is vital for investors, financial analysts, and businesses as it influences borrowing costs, liquidity flow, and interest rate trends in the economy. It serves as an indicator of the RBI’s stance on monetary policy—whether it aims to control inflation or stimulate growth. Monitoring this rate helps market participants anticipate changes in economic conditions and plan financial decisions accordingly.