What is Reverse Repo
Rate?

Introduction

If you already have a personal loan, or are actively exploring one, you would have noticed that interest rates keep changing. While most borrowers pay attention to the repo rate because it directly affects loan costs, there’s another rate that quietly influences these changes — the reverse repo rate.

You don’t need to dive into the technical details of how the RBI manages liquidity. What’s useful to know is that movements in the reverse repo rate can impact the interest you pay on your personal loan, helping you understand why rates rise or fall over time.

In this article, we’ve broken down the reverse repo rate in simple terms so you can understand how it affects your personal loan interest.

What is Reverse Repo Rate?

The reverse repo rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks. Currently set at 3.35% as of October 2025, this rate serves as the floor for short-term interest rates in the economy.

Think of it this way: when banks have excess funds sitting idle, they can deposit this money with the RBI and earn interest at the reverse repo rate. It's essentially the RBI saying, "We'll pay you this much interest if you lend us your surplus cash for a short period."

The meaning of reverse repo rate goes beyond just a number; it's a powerful monetary policy tool that the RBI uses to control money supply and maintain economic stability. Unlike the repo rate (currently 5.50%), which is about the RBI lending to banks, the reverse repo rate is about banks lending to the RBI.

What is a Reverse Repo Agreement?

A reverse repo agreement is a financial contract between the RBI and commercial banks.

Here's how it works in simple terms:

When banks have excess liquidity, they can enter into a reverse repurchase agreement with the RBI. The bank purchases government securities from the RBI with an agreement that the RBI will buy back these securities at a predetermined price after a specific period, typically overnight.

The difference between the purchase price and the repurchase price represents the interest earned by the bank at the reverse repo rate. This mechanism allows the RBI to absorb excess liquidity from the banking system when needed.

For example, if a bank has ₹100 crore in surplus funds, it can invest this amount with the RBI overnight at 3.35% interest rate. The next day, the bank receives back ₹100 crore plus interest, and the RBI gets the temporary use of those funds to manage overall market liquidity.

Why Does Reverse Repo Rate Matter for Interest Rates and Liquidity?

The reverse repo rate plays a crucial role in shaping the broader interest rate environment that affects your loans. Here's why it matters:

• Liquidity Management: When the RBI increases the reverse repo rate, banks find it more attractive to park their excess funds with the central bank rather than lending to customers. This reduces the money supply in the market, potentially leading to higher loan interest rates.
• Interest Rate Floor: The reverse repo rate acts as a floor for short-term interest rates. Banks won't typically lend money to other institutions at rates lower than what they can earn risk-free from the RBI.
• Inflation Control: By adjusting the reverse repo rate, the RBI can influence spending and investment patterns. Higher rates encourage banks to deposit more with the RBI, reducing money circulation and helping control inflation.
• Monetary Policy Transmission: Changes in the reverse repo rate signal the RBI's monetary policy stance. When the gap between repo and reverse repo rates widens, it indicates the central bank's intention to manage liquidity more actively.

Currently, with a 215-basis points gap between the repo rate (5.50%) and reverse repo rate (3.35%), the RBI maintains flexibility to adjust monetary conditions based on economic needs.

How Can Understanding Reverse Repo Rate Help You Choose the Right Loan Timing?

Knowing reverse repo rate trends can significantly improve your loan timing decisions. Here's your practical guide:

• Track Rate Movements: When the reverse repo rate remains stable or decreases, it often signals that the RBI is maintaining an accommodative monetary policy stance. This environment typically favours borrowers with potentially lower loan interest rates.
• Monitor Rate Spread: The difference between repo and reverse repo rates tells you about liquidity conditions. A wider spread (like the current 215 basis points) suggests ample liquidity in the system, which generally supports competitive loan pricing.
• Economic Cycle Timing: During economic slowdowns, the RBI often keeps reverse repo rates low to encourage banks to lend rather than park funds. If you're seeing consistently low reverse repo rates alongside economic recovery signals, it might be an optimal time to apply for loans.
• Personal Loan Strategy: For personal loans, timing your application when reverse repo rates are stable can help you secure better rates. Banks are more likely to offer competitive rates when they're encouraged to lend rather than deposit with the RBI.
• Home Loan Planning: If you're planning a home purchase, understanding that reverse repo rate trends often precede changes in home loan rates by a few weeks can help you lock in rates at the right time.
• Business Loan Decisions: For business loan, monitoring reverse repo rate trends alongside your business cycle can help you time expansion financing when rates are most favourable.

Conclusion

The reverse repo rate is more than just a monetary policy number; it's a valuable indicator that can guide your borrowing decisions.

At 3.35%, the current reverse repo rate supports a conducive lending environment, making it a potentially good time to consider your loan applications.

By keeping an eye on such rate changes, you can better understand why loan rates move and plan your applications at the right time.

Explore Kotak’s loan options and speak to our experts to time your borrowing decisions smartly.

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