What is Repo Rate? Meaning & How it Works

Repo rate is a powerful tool used by India’s central bank, the Reserve Bank of India (RBI), to maintain liquidity in the market and manage cash flow. The Monetary Policy Committee (MPC) of the RBI convenes bi-monthly to make changes to the repo rate according to economic conditions. It can be used to combat inflation, recession, induce cash flow, increase investment, etc. A hike or slash in the repo rate can have significant impacts on the economy, particularly the cost of borrowing credits. Thus, you must be aware of what is the meaning of repo rate and what it implies for you as the borrower.

Current repo rate in India

The current repo rate in India is 5.50%. It was revised on 6^th June, 2025, by the Monetary Policy Committee (MPC), which lowered it by 50 basis points from the previous repo rate of 6.00%.

Historical repo rates from 2010 to 2025

Here’s a table representing the historical repo rates in India:

What is Repo Rate?

The repo rate is the rate at which commercial banks borrow from the RBI by selling securities such as Treasury Bills to the central bank. Just like you, the borrower, borrow money from the bank by providing collateral and repaying the amount with an interest rate, commercial banks can also borrow money from the RBI in case of a cash crunch.

Here, the collateral is the Treasury Bills that commercial banks sell to the RBI, and the interest rate of borrowing is called the Repo Rate. However, the repo rate does not just affect the borrowing banks; it also affects the ordinary citizens of society.

How does the repo rate work?

The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks against government securities. When banks need to borrow money, they sell securities to the RBI with an agreement to repurchase them later at a slightly higher price. The difference in price reflects the repo rate. A lower repo rate makes borrowing cheaper, encouraging spending and investment, while a higher rate makes borrowing more expensive, helping to control inflation and slow down economic activity.

Significance of the repo rate

The repo rate is a highly crucial concept in economics and finance. Countless central banks and financial institutions use it to achieve specific macroeconomic objectives. These include:

1.     Controlling inflation

During periods of high inflation, central banks often raise repo rates. This makes borrowing funds more expensive, which can then reduce inflation.

2.     Promoting economic growth

Repo rate can also be used during periods of low economic growth. During this time, central banks may lower the repo rate, making borrowing funds easier.

3.     Managing liquidity

Another primary function of the repo rate is managing liquidity within the banking system. Central banks achieve this by adjusting the repo rate, which controls how much money banks can borrow.

Reserve Bank of India repo rate

The latest repo rate and reverse repo rate are highlighted in the table below:

What is the reverse repo rate?

The reverse repo rate refers to the interest rate at which the country’s commercial banks lend to the RBI. The central bank can use it as a tool to control liquidity in the banking system. Unlike the repo rate, the reverse repo rate is fixed at 3.35% and does not change.

Difference between repo rate and reverse repo rate

Central banks use the repo rate and reverse repo rate to control inflation and manage liquidity. The two serve as crucial tools, and understanding the difference between the two can be beneficial. 

How does RBI calculate repo rate?

The RBI does not follow a defined mathematical formula to calculate the repo rate. It relies on an assessment of economic indicators, including GDP growth, inflation, etc. The Monetary Policy Committee (MPC) revises the rate during policy meetings to address inflation and boost economic activity.

Here’s an example to understand the repo rate calculation.

If the RBI sets the repo rate at 6% and a bank borrows Rs. 1,00,000 from it, the repayment will be:

• Rs. 1,00,000 + (6% interest) = ₹ 1,06,000

The ₹ 6,000 above the principal amount is the cost of borrowing and indicates the repo rate.

Key economic indicators the RBI considers for repo rate decisions:

• Inflation
• GDP growth
• MPC’s suggestions
• Liquidity in the banking system
• Fiscal deficit and government borrowing
• Global economic conditions
• Currency stability and forex reserves

What is affected by a change in repo rate?

Changes in the repo rate can affect several areas of a country’s economy. These include:

1.    Inflation

Inflation is often controlled by changing the repo rate. For example, during periods of high inflation, the RBI will increase the repo rate, making it more challenging to borrow funds, thereby reducing the money supply and inflation.

2.     Interest rates

Adjusting the repo rate also often controls loan interest rates, which impacts the cost of personal loans, business loans, and mortgages.

3.     Currency values

Higher repo rates can increase the national currency value.

The relationship between the repo rate and interest rates

The relationship between the repo rate paid by the bank to the RBI and the interest rates paid by the borrower to the bank is directly proportional. The greater the repo rate, the higher the cost of borrowing. Let us understand this with two examples.

Scenario 1: RBI hikes repo rate

As of December 2020, the repo rate was 4%. Suppose that the RBI increases this to 6%. This means that now, the cost of borrowing from the RBI has increased by 2% or 200 basis points for commercial banks. To compensate for the high cost of borrowing, banks will, in turn, charge a higher interest rate to their borrowers. As a result, loans will become expensive for citizens.

Scenario 2: RBI slashes repo rate

Alternatively, if the RBI slashes this rate from 4% to 3.75%, borrowing will become more affordable than before for banks. They will reduce the interest rates for loans, and taking a loan from the bank will become cheaper for citizens.

In addition to affecting the interest rates on a loan, the repo rate also impacts the returns on direct deposits. If there is a repo rate cut, you will earn a lower interest rate and vice versa.

How does the repo rate impact consumer interest rates?

The RBI’s repo rate can also impact consumer interest rates. It is essential to understand these effects for proper financial planning and decision-making:

1.     Borrowing costs

A lower repo rate reduces banks’ cost of borrowing funds, which often translates to lower interest rates on loans and credit for consumers and businesses. This can encourage borrowing and spending, boosting economic activity.

2.     Deposit rates

Banks may also lower deposit interest rates in response to a lower repo rate, as this reduces their cost of borrowing. This can impact a consumer’s returns on savings.

3.     Inflation control

A higher repo rate increases borrowing costs, leading to higher interest rates on loans and credit. This means consumers must pay higher interest payments on loans, mortgages, and more. This can reduce borrowing and spending, helping control inflation by cooling down economic activity.

Conclusion

Whether you are an investor, consumer, or business owner, understanding the repo rate meaning is crucial. Understanding the impact repo rates have on interest rates, economic growth, and inflation can allow you to make better, more informed financial decisions.

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