Reverse Repo Rate
The Reverse Repo Rate (RRP) is the interest rate at which the Federal Reserve (or another central bank) borrows cash from eligible counterparties overnight by temporarily selling securities with an agreement to repurchase them, effectively setting a floor under short-term interest rates and absorbing excess liquidity from the financial system.
A reverse repurchase agreement is the mirror image of a repo from the central bank's perspective. In a standard repo, the Fed lends cash to banks. In a reverse repo, the Fed borrows cash from money market funds, banks, and government-sponsored enterprises by temporarily selling Treasury securities to those counterparties and agreeing to buy them back the next day at a slightly higher price. The annualized interest implied by this price difference is the reverse repo rate.
The Federal Reserve's Overnight Reverse Repo (ON RRP) facility became one of the most significant fixtures in US money markets following the massive liquidity injections of the 2020-2021 pandemic stimulus period. With the Fed holding the federal funds rate near zero and the banking system flooded with reserves, money market fund yields were at risk of going negative — a politically and operationally problematic outcome. The ON RRP facility provided a vehicle for money market funds to park trillions of dollars at the Fed at a positive rate (the RRP rate was set just above zero, eventually rising in tandem with the federal funds rate), preventing negative short-term rates and providing an effective floor for overnight money market rates.
Usage of the ON RRP facility peaked at over $2.5 trillion in late 2022 as the Fed raised rates rapidly and money market funds channeled excess cash into the facility rather than private markets. As Treasury bill issuance increased and bank reserves normalized, ON RRP usage declined sharply through 2023 and 2024, with the balance falling from its peak toward more historically normal levels.
In countries like India, the Reserve Bank of India uses the reverse repo rate as an explicit policy rate tool alongside the repo rate. The corridor between the repo rate (at which the RBI lends to banks) and the reverse repo rate (at which it absorbs surplus liquidity) defines the interest rate band within which the interbank overnight rate is expected to trade, giving the central bank a bounded range rather than a single point target.
For market participants, the RRP rate serves as a baseline for pricing money market instruments. When the Fed announces rate hikes, the ON RRP rate moves in lockstep with the lower bound of the federal funds target range, immediately repricing the return available on cash-equivalent instruments across the financial system.