Repo Rate
The Repo Rate (short for Repurchase Rate) is a key monetary policy instrument used by a country’s central bank—in India, the Reserve Bank of India (RBI)—to regulate liquidity, inflation, and money supply in the economy. It represents the rate at which the central bank lends short-term funds to commercial banks against government securities as collateral.
The repo rate directly influences borrowing costs in the financial system, thereby affecting interest rates on loans, deposits, and overall economic activity.
Definition and Meaning
The Repo Rate is the rate at which the RBI lends money to commercial banks for short durations, usually overnight or up to 14 days, by purchasing government securities from them with an agreement to repurchase them later at a predetermined price.
The term “repo” is derived from repurchase agreement. It is a collateralised loan, meaning the borrower (commercial bank) sells securities to the lender (RBI) with a commitment to buy them back at a future date.
Formally:
Repo Rate = Interest rate charged by the central bank when lending to commercial banks for short-term liquidity needs.
Purpose of the Repo Rate
The repo rate serves as a primary tool of monetary policy to achieve the following objectives:
- Control Inflation: Higher repo rates make borrowing costlier, reducing money supply and inflationary pressure.
- Encourage Growth: Lower repo rates make borrowing cheaper, stimulating investment, consumption, and economic growth.
- Manage Liquidity: Helps maintain liquidity equilibrium in the banking system.
- Stabilise Financial Markets: Ensures short-term stability in inter-bank lending and interest rates.
Mechanism of Operation
The repo rate influences money supply and credit flow through the following process:
-
When the Repo Rate is Increased:
- Borrowing from the RBI becomes expensive for banks.
- Banks pass on the higher cost to customers by raising loan interest rates.
- Borrowing and spending decrease, reducing inflationary pressure.
-
When the Repo Rate is Decreased:
- Borrowing from the RBI becomes cheaper.
- Banks lower lending rates, encouraging loans and investments.
- Money supply in the economy increases, stimulating growth.
Thus, the repo rate acts as a monetary transmission channel between the RBI and the broader economy.
Example
If the RBI repo rate is 6.5%, and a commercial bank borrows ₹1,000 crore for 7 days, it will repay ₹1,000 crore + ₹1.25 crore (interest at 6.5% annualised for 7 days). This short-term borrowing helps the bank meet liquidity shortages or maintain regulatory reserves.
Reverse Repo Rate
The Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks by selling government securities with an agreement to repurchase them later. It serves as the opposite of the repo rate and helps the RBI absorb excess liquidity from the banking system.
The difference between the repo rate and reverse repo rate is known as the policy corridor, which guides short-term interest rates in the market.
Relationship with Other Monetary Policy Tools
The repo rate works in coordination with other policy instruments:
- Reverse Repo Rate: Controls excess liquidity.
- Cash Reserve Ratio (CRR): Regulates the proportion of deposits banks must hold with the RBI.
- Statutory Liquidity Ratio (SLR): Maintains liquidity safety within banks through investment in government securities.
- Marginal Standing Facility (MSF): Allows banks to borrow overnight from the RBI at a rate higher than the repo rate in emergencies.
These tools collectively form part of the Liquidity Adjustment Facility (LAF) framework, through which the RBI manages short-term liquidity and monetary stability.
Determination of Repo Rate in India
The Monetary Policy Committee (MPC) of the RBI determines the repo rate in its bi-monthly monetary policy meetings. The MPC comprises six members—three from the RBI (including the Governor as Chairperson) and three nominated by the Government of India.
The committee reviews macroeconomic indicators such as inflation, GDP growth, exchange rate, fiscal deficit, and global trends before deciding on repo rate changes.
Historical Trends in India
- In the 1990s, the repo rate was introduced as part of India’s financial reforms to modernise monetary policy operations.
- During the global financial crisis (2008–09), the RBI reduced the repo rate sharply to infuse liquidity and support growth.
- During the COVID-19 pandemic (2020–21), the repo rate was reduced to a historic low of 4.00% to cushion economic shock.
- As of 2025, the repo rate stands at around 6.50%, reflecting RBI’s focus on controlling inflation while maintaining growth momentum. (The exact rate may vary depending on recent policy decisions.)
Impact of Repo Rate Changes
-
On Borrowers:
- When the repo rate rises, loan EMIs (Equated Monthly Instalments) increase due to higher lending rates.
- When it falls, borrowing becomes cheaper, stimulating housing, automobile, and business loans.
-
On Banks:
- Higher repo rates increase banks’ borrowing costs and reduce liquidity.
- Lower repo rates enhance liquidity and profitability.
-
On Inflation:
- A higher repo rate curbs inflation by reducing money supply.
- A lower repo rate can spur inflation by increasing demand and spending.
-
On Investments and Markets:
- Lower rates encourage stock market activity and capital investment.
- Higher rates may shift funds towards fixed-income securities.
-
On Currency Exchange Rates:
- An increase in repo rate can attract foreign investment, strengthening the domestic currency.
- A decrease may lead to depreciation as investors seek higher returns elsewhere.
Advantages of the Repo Rate Policy
- Provides flexibility to respond to inflationary or deflationary pressures.
- Enhances liquidity control and short-term financial stability.
- Acts as a benchmark for other interest rates in the economy.
- Facilitates monetary transmission through financial institutions.
Limitations and Challenges
- Changes in repo rate may take time to transmit to market interest rates, reducing policy effectiveness.
- Structural factors like banking inefficiency and non-performing assets (NPAs) can blunt its impact.
- In a weak economy, lowering repo rates alone may not boost demand if businesses or consumers remain risk-averse.
- External factors like oil prices and global interest rates can influence domestic outcomes beyond the RBI’s control.
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Anonymous
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a
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syedrafi
October 5, 2011 at 12:35 pmrepo rate 8.25
reverse repo rate 7.25
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preksha
October 12, 2011 at 8:41 pmthnx for sharing such useful info but can u tell me under bank rate and repo rate duration of loan provided by RBI to banks
bank rate: greater than one year or 90 days.
repo rate:1 to 14 days or till 90 days
.
preksha
October 15, 2011 at 12:08 pmdo reply as soon as possible,anyone know the answer
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shweta singh
November 23, 2011 at 6:26 pmplz send me table of current ratas.like repo rate etc.
Ashutosh Upadhyay
November 14, 2014 at 10:54 amcurrent repo rate is………….7.75%to7.50%
khemraj
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v p singh
December 17, 2011 at 5:44 pmnow i can differenciate between repo and bate rate .. after a very long time..
shadab
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srinivas
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dinesh paliwal
January 29, 2013 at 4:07 pmnow the repo rate is :-7.75
rev.repo:-6.75
crr :-4
bank rate:-8.75
msf :-8.75
slr :-23
sandeep
January 30, 2013 at 1:14 pmthank to providing these important information
Sonika parihar
February 4, 2013 at 8:27 pmNce information
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shubham
February 18, 2013 at 9:47 pmwhat is the minimum and maximum time duration of repo rate….
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smart1
August 10, 2013 at 12:29 pmThe Reserve Bank of India (RBI) kept interest rates unchanged on Monday after cutting them in each of its previous three policy reviews, warning of upward risks to inflation posed by a falling rupee and increases in food prices.
The RBI also called for vigilance over global economic uncertainty, citing the risks of a reversal of capital flows from emerging markets. Such outflows would exacerbate the country’s high current account deficit.
Following are highlights from the monetary policy statement:
Policy Measures
Keeps repo rate unchanged at 7.25 percent.
Reverse repo rate stays at 6.25 percent.
Cash reserve ratio unchanged at 4.00 percent.
Marginal Standing Facility rate stays at 8.25 percent.
Bank rate stays at 8.25 percent.
Bhuvana
May 13, 2014 at 2:33 pmwhether repo rate is at the rate it repurchase the gvt bonds or the rate at which bank has to pay interest to the RBI