What is repo rate?
Repo Rate is also known as the ‘Repurchasing Agreement’ and is the interest rate at which the central bank of the country lends money to recognized commercial banks to achieve several fiscal goals for the economy. Repo Rate full form or the term ‘REPO’ stands for ‘Repurchasing Option’ Rate. The term ‘REPO’ denotes ‘repurchase option or agreement.’ Used as a tool in the financial market, it facilitates borrowings through collateral of specific debt instruments in the economy.
Commercial financial institutions in India can borrow money from the Reserve Bank of India (RBI) for a set period of time. They can do this by providing government bonds, treasury bills, and similar securities as collateral. The RBI sets the interest rate for these loans based on its policies.
As borrowers, these financial institutions pay interest to the RBI as per the applicable repo rate. At the tenure’s end, they can repurchase these bonds from RBI by repaying a predetermined price. As a monetary tool, the repo rate primarily serves to keep inflation in check apart from fulfilling other monetary requirements.
Current repo rate in India
Today, the current repo rate stands at 6.50% as per the recent update of 8th February 2024 when RBI decided to keep the rate unchanged. The last time the repo rate was changed from 6.25% to 6.50% on 8th February 2023. As of now the reverse repo rate stands at 3.35%.
When was the RBI repo rate changed?
On Feb 8, 2023, RBI's MPC increased repo rate by 25 bps to 6.50%.
Repo Rate Trends
Last Update Date |
RBI Repo Rate |
August 8, 2024 |
6.50% |
June 7, 2024 |
6.50% |
February 8, 2024 |
6.50% |
December 8, 2023 |
6.50% |
June 8, 2023 |
6.50% |
February 8, 2023 |
6.50% |
December 7, 2022 |
6.25% |
September 30, 2022 |
5.90% |
August 5, 2022 |
5.40% |
June 8, 2022 |
4.90% |
May 4, 2022 |
4.40% |
October 9, 2020 |
4.00% |
August 6, 2020 |
4.00% |
May 22, 2020 |
4.00% |
March 27, 2020 |
4.40% |
February 6, 2020 |
5.15% |
December 5, 2019 |
5.15% |
October 10, 2019 |
5.15% |
August 7, 2019 |
5.40% |
June 6, 2019 |
5.75% |
April 4, 2019 |
6.00% |
February 7, 2019 |
6.25% |
August 1, 2018 |
6.50% |
June 6, 2018 |
6.25% |
August 2, 2017 |
6.00% |
October 4, 2016 |
6.25% |
April 5, 2016 |
6.50% |
September 29, 2015 |
6.75% |
Availing loans from financial institutions attracts interest payment on the principal amount. The interest, along with any other charges, comprises the total cost of credit.
RBI Rate - January 2025
| Type of Rate | Current Rate |
| Repo Rate | 6.50% |
| Bank Rate | 6.75% |
| Reverse Repo Rate | 3.35% |
| Marginal Standing Facility Rate | 6.75% |
How Does RBI Calculate Repo Rate?
The Reserve Bank of India (RBI) calculates the repo rate by considering a variety of factors, including:
Economic indicators:
The RBI's Monetary Policy Committee (MPC) analyses economic data and macroeconomic indicators like inflation, GDP growth, and employment.
Inflation:
The RBI sets an inflation target to control inflation. If inflation is high, the RBI may increase the repo rate to reduce demand and curb spending.
Economic growth:
The RBI considers the state of economic growth. Higher repo rates can slow economic growth by making it more expensive for businesses and individuals to borrow.
Liquidity:
The RBI assesses the liquidity conditions in the banking system. If there is excess liquidity, the RBI may increase the repo rate to absorb the surplus funds.
External factors:
The RBI also considers global economic conditions, geopolitical events, and international trade dynamics.
Forward-looking approach:
The MPC takes into account both current economic conditions and future projections.
How does repo rate work?
The application of repo rates is based on the same concept and works in line with this borrowing-lending functionality. While financial institutions lend money to the public, they also need to borrow money during fund shortages/ financial crunch.
RBI fulfils this requirement of commercial financial organisations by initiating a repo transaction, i.e. lending money, and charging interest as per the existing repo rate.
The repo transaction completed between RBI and any commercial bank comprises specific components listed below:
- Financial institutions must provide RBI with eligible security that the RBI recognises and that exceeds the Statutory Liquidity Ratio (SLR) limit when borrowing.
- Loans provided to commercial lenders can be as per overnight or term agreements.
- The applicable RBI repo rate charges interest on the loan amount.
- On loan repayment, financial lenders repurchase the security provided to RBI as collateral.
There are multiple ways money circulates through the economy, and one of the most significant channels is through commercial banks. When the central bank changes the repo rate, it can have an impact on the cost of credit for financial companies. This change in cost can, in turn, affect the lending policies of financial companies, leading to changes in the interest rates at which they offer loans to the public.
Impact of repo rate cut
RBI reduced the repo rate due to a drop in liquidity in the country's money market. It impacts economic aspects that increase the flow of money, making finances more readily available to the public.
Since commercial financial institutions can obtain loans from RBI at reduced rates, they extend the advantages of decreased interest rates to their customers. One can consequently avail of different types of loans at a lower cost of credit. An overall increase in affordable finances allows borrowers to avail of loans of a higher amount and spend more, thus increasing monetary flow.
- Availability of loans to consumers at cheaper rates
- Increase in affordability
- Increased ticket size of loans from retail consumers, thus improving liquidity
- Significant growth in the economy’s overall consumption
- Increased consumption, driving the economy toward growth
The RBI cuts repo rates to increase liquidity and stimulate economic growth when necessary. On the other hand, increased liquidity can also pose challenges for the economy in the form of inflation. For this reason, central banks initiate rate cuts in smaller percentages such as 25 bps or 0.25%.
How repo rate impacts your taxes and financial planning
The repo rate, set by the Reserve Bank of India (RBI), indirectly influences your tax liabilities and financial strategy. A change in the repo rate affects loan interest rates, EMIs, and disposable income, which can alter your financial planning. Understanding these effects can help you align with the current tax concept.
For instance, lower interest rates may increase borrowing capacity, indirectly impacting your taxable income bracket. To know how this ties into the income tax slab, consider how adjusted finances due to loans or investments influence your overall tax outflow. Learn more about navigating income tax implications to optimise savings.
Importance of repo rate
- The importance of repo rate extends to its effects on various aspects of a country’s economy
- The RBI uses it as a control mechanism to infuse or decrease liquidity in the financial system
- Repo rate change affects bank funding costs and thus impacts retail lending policies
- Repo rate cuts aid inflation control and price stability in finance
- Change in repo rates affects other rates like home loan interest rates, rates on bank deposits, etc
Commercial lending companies are offering loans and advances at reduced rates due to the current trend of rate cuts. It increases competition in the market, thus encouraging other financial institutions to reduce interest rates on various credits.
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Frequently Asked Questions
Repo rate serves as an effective financial tool and helps in monitoring the country’s liquidity, money supply and inflation levels. All these factors tend to be directly proportional with the rise and fall of the repo rate due to its direct relationship with the cost of borrowing for financial institutions.
Consequently, its primary effects on the economy are as follows:
- Effective regulation in the inflation level of the economy.
- Increase or decrease in the economy’s money supply.
- Increased or decreased overall consumption.
- Effect on cash availability for retail consumers.
- Overall economic growth.
As the repo rate significantly impacts the economy, the RBI makes sure to use it as a tool to regulate the financial market and formulates its Monetary Policy accordingly.
The relationship between inflation and the repo rate is crucial in the context of monetary policy. Inflation refers to the sustained increase in the general price level of goods and services over time, while the repo rate is the rate at which the central bank (such as the Reserve Bank of India) lends money to commercial banks. Here's the relationship between inflation and the repo rate:
- Control of Inflation: One of the primary objectives of central banks, including the RBI, is to maintain price stability by controlling inflation. When inflation is high, it erodes the purchasing power of money and creates economic instability. The central bank uses various tools, including the repo rate, to manage inflation.
- Repo Rate and Inflation: The repo rate influences lending rates in the economy, affecting borrowing costs for banks and, subsequently, businesses and consumers. The relationship between the repo rate and inflation can be understood as follows:
- High Inflation: If inflation is high or accelerating, the central bank may increase the repo rate. A higher repo rate increases the cost of borrowing for banks, which can result in higher lending rates for businesses and consumers. The higher borrowing costs aim to reduce spending and investment, thereby cooling down the economy and curbing inflationary pressures.
- Low Inflation: Conversely, if inflation is low or below the desired target, the central bank may decrease the repo rate. A lower repo rate reduces borrowing costs for banks, leading to lower lending rates. This reduction in borrowing costs aims to stimulate borrowing, investment, and consumption to boost economic activity and increase inflation.
- Impact on Aggregate Demand: By adjusting the repo rate, the central bank influences the cost of credit and the availability of funds in the banking system. Changes in the repo rate have a cascading effect on interest rates across the economy, affecting borrowing, investment, and spending decisions of businesses and individuals. These changes in aggregate demand, in turn, influence inflationary pressures in the economy.
- Transmission Mechanism: Changes in the repo rate affect various sectors of the economy differently. For instance, a rise in the repo rate can lead to higher lending rates, making loans more expensive. This can potentially reduce consumer spending, business investment, and demand for housing, which may help moderate inflationary pressures. Conversely, a decrease in the repo rate can stimulate borrowing and investment, leading to increased consumer spending and economic activity, which may contribute to inflation.
It's important to note that the impact of the repo rate on inflation is not immediate and can vary based on several factors, including the overall economic conditions, market dynamics, and other policy measures. Central banks carefully assess inflation trends and economic indicators before making decisions on adjusting the repo rate to maintain price stability and support sustainable economic growth.
With an increase in repo rate, the cost of credit increases for commercial banks, thus making loans expensive for them. It limits their capacity to borrow and also prompts them to increase the rate of interest offered to retail borrowers for various loans and advances.
As bank loans become expensive for customers, it discourages them from borrowing more. It results in an overall decrease in money supply to the market, impacting the liquidity. A decreased availability of money tends to contain inflation. It is the primary reason why the RBI resorts to increasing this rate during periods of high inflation.
Similar to repo rates, another market instrument RBI uses to control and regulate the money market is reverse repo rate. It is a rate at which commercial lending organisations deposit their surplus cash to the RBI and earn interest. Unlike repo rates, these rates carry an inverse relationship with the economy’s money supply.
Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks and lenders. This rate is decided by the RBI and is always less than the Repo Rate. The act of borrowing money by the RBI is a reactionary measure to curb the excess liquidity in the market observed during high levels of inflation. This encourages banks to park their money with the central bank and extend less funds to borrowers.
The repo rate and the Marginal Cost of Funds-based Lending Rate (MCLR) are two different interest rates used in the Indian banking system for different purposes. Here's a comparison of the two:
1. Purpose:
- Repo Rate: The repo rate is the rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks. It is a tool used by the central bank to manage liquidity in the banking system and influence key macroeconomic factors.
- MCLR: The MCLR is the benchmark interest rate used by banks to determine the lending rates for various loans, including home loans and other retail loans. It is an internal reference rate set by each bank based on its cost of funds and other factors.
2. Determination:
- Repo Rate: The repo rate is determined by the RBI's Monetary Policy Committee (MPC) through periodic reviews and decisions based on macroeconomic factors, inflation trends, and liquidity conditions.
- MCLR: The MCLR is determined by individual banks based on their own cost of funds, operational expenses, and policy decisions, as per the guidelines set by the RBI. Each bank sets its own MCLR, and it can vary from one bank to another.
3. Tenor:
- Repo Rate: The repo rate is a short-term interest rate, typically ranging from overnight to a few weeks or months.
- MCLR: The MCLR is applicable for various tenors, such as overnight, one month, three months, six months, and one year. Each tenor represents a different time period for which the lending rate remains fixed.
4. Applicability:
- Repo Rate: The repo rate directly affects banks' cost of borrowing from the RBI and indirectly impacts market interest rates. It influences the interest rates on various loans and deposits offered by banks.
- MCLR: The MCLR directly impacts the lending rates offered by banks to borrowers. It serves as a benchmark rate for floating rate loans, including home loans and other retail loans.
5. Regulatory Oversight:
- Repo Rate: The repo rate is determined and regulated by the RBI as part of its monetary policy framework. The RBI periodically reviews and sets the repo rate to maintain price stability and support economic growth.
- MCLR: The MCLR is determined by individual banks but is subject to regulatory oversight by the RBI. The RBI sets guidelines for the calculation and implementation of the MCLR to ensure transparency and fairness in lending rates.
In summary, the repo rate is set by the RBI to manage liquidity and influence macroeconomic factors, while the MCLR is an internal reference rate set by banks to determine lending rates for various loans. The repo rate impacts market interest rates, while the MCLR directly affects the interest rates offered by banks to borrowers.
During high levels of inflation, increasing the repo rate is a considerable measure that helps control inflation. A rise in repo rate translates into increased rate of interest on loans extended by commercial banks to the lenders. This makes borrowing money expensive particularly for businesses and industries, which slows down production, investment and the overall supply of money in the market - subsequently bringing down inflation.
Repo rates are beneficial for the economy in general to control inflation and deflation. When Repo rate reduces, it allows commercial banks and lenders to borrow money from RBI at a lower interest rate. This benefit is then passed on to their customers by reducing the interest rates on the loans they offer. It also decreases the cost of commodities considering industries and businesses also borrow at a lowered rate of interest.
As an end consumer, a decrease in repo rate would mean you get to borrow a loan at a lowered rate of interest. Which means you have to shell out less money as EMIs while you enjoy the same amount of principal value. On the other hand, if repo rate increases, your floating rate of interest would automatically be increased and so would your EMIs.
Basis Point (BPS) is a unit of measurement used to indicate small changes in percentages, especially in interest rates and financial variables. One basis point is equivalent to 0.01%. In the context of the repo rate, changes are often expressed in basis points. For example, a 25-basis point increase means the rate has been raised by 0.25%. This standard practice simplifies precise communication and comparisons in the financial industry.
The Narasimhan Committee on Banking Sector Reforms recommended the introduction of repo rates as a part of Liquid Adjustment Facility (LAF) in 1998. Simultaneously, the concept of repo rates was introduced in RBI’s Monetary Policy.
As per these policies, repo rate is primarily used to control and regulate the available liquidity in India’s economic system. An increase in these rates limits the availability of liquidity, thus curbing a surge in inflation as well as bringing it down.
Alternatively, any reduction in this rate enables increased borrowings for commercial lenders as a result of reduced cost of credit. The recent Monetary Policy regarding cuts in repo rates has been in line to increase liquidity in the financial system, thus driving economic growth.
