Reverse repo
The transaction where the central bank borrows money from banks against securities, paying interest on it — the mirror image of a repo, where the central bank instead lends.
In plain language
A repo is the central bank lending to banks. A reverse repo runs the other way: the central bank itself borrows from banks, against securities, and pays interest for the privilege.
Both are short-term liquidity tools. Which one the central bank uses at a given moment depends on whether it wants to add money to the banking system or pull money out of it.
How it works
The workbook's own contrast: "Repo Rate is applied when the central bank is lending against securities, Reverse Repo is when it is borrowing money against securities." Both are overnight-to-short-term tools, unlike Bank Rate, which the workbook reserves for medium to long-term or emergency lending. Reverse repo drains liquidity from the banking system rather than adding it, which is why central banks use it when there is too much surplus cash chasing too few safe assets.
It sits in the same monetary policy toolkit as the repo rate, Bank Rate and CRR/SLR, all covered in section 5.3.7 of the workbook.
A worked example
Illustrative rate — not the current policy rate. Banks have surplus cash and park Rs 5,000 crore overnight with the central bank under a reverse repo, at 5.75%.
5,000 × 5.75% ÷ 365 = Rs 0.7877 crore ≈ Rs 78.77 lakh for one day
The banks earn that Rs 78.77 lakh in interest for lending to the central bank instead of to each other or to borrowers — money that, for that one day, is out of circulation in the wider economy, which is exactly the draining effect a reverse repo is meant to have.
Why NISM asks about it
Chapter 5.3.7 lists reverse repo alongside repo, Bank Rate, CRR and SLR as monetary policy tools. Expect a direct question on which of the central bank's tools involves it borrowing rather than lending.
Common exam traps
- Repo: the central bank lends. Reverse repo: the central bank borrows. This is the single most commonly reversed pair in the whole monetary-policy section.
- Stale in the workbook. RBI has used the Standing Deposit Facility as the floor of its liquidity corridor since April 2022, rather than the fixed-rate reverse repo. Answer the exam from the workbook's section 5.3.7 text.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Bank RateThe rate at which the central bank lends to commercial banks without collateral, for medium to long-term or emergency needs — one of RBI's tools for controlling money supply and rates.
- CRRThe minimum percentage of a bank's total deposits that it must hold as cash reserves with the central bank, earning no interest — one of RBI's tools for controlling money supply.
- Monetary policyThe central bank's management of money supply and interest rates to promote growth and hold prices stable — expansionary when it wants to push the economy up, contractionary when it wants to cool it.
- Repo rateThe rate at which the central bank lends money to banks for a very short term against approved securities — the main lever it pulls to make money cheaper or dearer.
- RepoA ready forward contract: borrowing money by selling securities with an agreement to buy them back later at a higher price that includes the interest.