Reverse Repo Rate

The interest rate paid by a central bank to commercial financial institutions for borrowing cash overnight against eligible securities.

The reverse repo rate (or overnight reverse repurchase agreement rate) is the interest rate paid by a central bank to commercial banks and eligible financial counterparties when borrowing cash overnight against qualifying collateral, typically government securities. In a reverse repo transaction, the financial institution provides cash to the central bank in exchange for Treasury bonds or similar low-risk assets, agreeing to resell those assets back the next business day at a slightly higher price. The difference between the purchase price and the repurchase price reflects the annualized reverse repo rate. Central banks use the reverse repo facility as an active monetary policy tool to manage short-term liquidity in the financial system. By absorbing surplus cash from money market funds and commercial banks, the central bank prevents excess market liquidity from driving overnight interest rates below its target range. The reverse repo rate acts as an effective floor for short-term money market yields, because cash holders have little incentive to lend money to private market participants at a rate lower than what the central bank guarantees. For investors and market analysts, changes in the reverse repo rate directly affect money market fund yields, interbank lending rates, short-term Treasury bills, and the broader cost of capital. A high usage of the reverse repo facility indicates that money markets are saturated with excess liquidity that institutions cannot deploy elsewhere at attractive risk-adjusted returns. Conversely, a rapid decline in reverse repo balances suggests that liquidity is flowing back into the broader financial system or commercial debt markets.

A money market fund has $100,000,000 in excess cash overnight and uses the central bank's reverse repo facility at an annualized rate of 5.30%. Daily interest rate = 5.30% / 360 days = 0.014722% per day (using standard money market conventions) Overnight interest earned = $100,000,000 0.00014722 = $14,722.22 The fund provides $100,000,000 in cash, receives government securities as collateral, and receives $100,014,722.22 back from the central bank the next business day.