Reverse repo rate is used by banks to park their surplus with RBI. As Triparty Repo Dealing and Settlement (TREPS) and call money rates are ruling higher than the reverse repo rate, it is necessary to raise repo rate to keep it attractive for banks to park their surplus with the RBI. Reverse repo rate remains low since the RBI’s revised liquidity management framework in February 2020. Since then, the RBI has retained the width of the liquidity management corridor at 50 basis points – the reverse repo rate being 25 basis points below the repo rate (of 4 per cent) and the Marginal Standing Facility rate 25 basis points above the repo rate. Normalisation of reverse repo means raising it from the present level of 3.35 per cent to a higher level, say for example, for example, to 3.75 per cent in one or two stages.
The width of this corridor was increased to 90 basis points in the April-May 2020 Covid period by cutting the reverse repo rate. The purpose of the aforementioned cut in reverse repo rate was to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and use these funds for on-lending to productive sectors of the economy. As the Indian economy is normalizing after the third cycle of the COVID pandemic many banking experts including Soumya Kanti Ghosh, Group Chief Economic Adviser, believe that time for reverse repo rate normalization has come.