The repo rate, also known as the repurchase rate, is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. This interest rate directly affects the consumers, as it decides the cost of borrowing for individuals and businesses.
In layman’s language, when banks are short on funds, they avail a loan from the RBI. RBI grants a loan to such banks against government securities at a specific interest rate. That specific interest rate is known as the repo rate.
It’s called repo because the lending is done with the agreement that the borrowing bank will repurchase the securities at a later date. Firstly, the commercial banks sell the government securities to the central bank, i.e., RBI, and they also agree to repurchase them at a predetermined price and date. In short, it is the cost of borrowing for banks.
RBI treats the repo rate as a monetary policy tool used by the central bank to control liquidity (cash flow) in the economy and influence growth and inflation.
The Impact of Repo Rate
You might have heard the news that the RBI changed the repo rate again, or it went unchanged after a monetary policy meeting. Well, the impact of the repo rate is not just limited to banks—it creates a long chain of reactions across the entire economy. From its impact on consumers to lending rates and businesses, there are a variety of ways in which the repo rate affects the various sectors.
- Commercial Banks
A higher repo rate means commercial banks have to pay more interest to RBI if they borrow from it. Hence, it reduces their incentive to borrow short-term funds.
Whereas a lower repo rate means a low interest rate on loans from the RBI. This cheaper borrowing will provide the banks the liquidity to lend more money to consumers and businesses at a lower interest rate, stimulating economic activity.
- Lending Rates
The repo rate directly influences the Marginal Cost of Funds-based Lending Rate (MCLR), which is the minimum interest rate below which a bank isn’t allowed to lend money.
When the repo rate rises, banks will pass the higher cost to their customers. It means they will increase the loan interest rates; as a result, EMIs will rise, and borrowings will slow down. When the repo rate falls, banks will lower the interest rates they charge. For end consumers, borrowings will become attractive, leading to more spending and investment in the economy.
- Consumers
With a rise in the repo rate, bank customers will be charged more through higher EMIs and loan interest rates, and vice versa. In short, even for bank customers, higher repo means costlier borrowing, and lower repo means cheaper borrowing.
But, a positive point is that when the RBI increases the repo rate, banks also raise their deposit interest rates to attract funds from customers, which results in higher returns for depositors.
- Businesses
With an increase in repo rate, businesses may find it unattractive to borrow funds at a higher interest rate. They will aim to delay new projects, which may result in slow overall growth. Whereas, with a low repo rate, businesses will borrow more money to expand their business operations, make new investments, and create jobs.
- Inflation
An increase in the repo rate makes borrowing more expensive, which leads to lower spending and lower demand, putting a barrier on the inflation rate. On the other side, a decrease in the repo rate encourages borrowing and spending, which potentially leads to an increase in demand and the inflation rate.
- Currency & Foreign Investment
With a rise in the repo rate, the domestic interest rate increases, and the higher interest rates make deposits and bonds in that country more attractive. This results in capital inflows from the foreign investors seeking higher returns. As a consequence, demand for that domestic currency rises, which makes the currency stronger.
On the opposite side, when the repo rate falls, the domestic interest rate falls—which means returns on deposits and bonds also fall down. Consequently, foreign investors will withdraw funds to seek higher returns from elsewhere. Hence, the demand for the domestic currency will fall, so the currency depreciates and becomes weaker.
- Impact on the Stock Market
A higher repo rate means higher borrowing costs, which lowers the profit for companies. Hence, investors may sell stocks, and the market will fall down. Whereas, a lower repo rate means cheaper loans, which results in business growth. It turns out as a positive for the stock market, as companies can expand and generate higher profits.
Repo Rate vs Reverse Repo Rate
As we already discussed above, the repo rate is the interest rate at which RBI loans money to commercial banks.
On the other hand, the reverse repo rate, also known as the Standing Deposit Facility (SDF), is the interest rate at which RBI borrows money from commercial banks. The majority of the bank organizations opt for this safer strategy to park their surplus funds and earn interest. The objective of the reverse repo rate is to reduce the overall supply flow of money in the economy, and typically the rate of interest is less than the repo rate.
When the reverse repo rate is high, the money supply in the economy falls down, as the commercial banks parked all their surplus money with the RBI. Whereas, when the reverse repo rate is low, the money supply in the economy rises, as the commercial banks prefer to lend more money to individuals and customers rather than depositing it with RBI.
As of September 2025, the current repo rate in India is 5.50%, and the reverse repo rate is 3.35%.
Conclusion
The repo rate in India is not just a financial tool—it’s a powerful instrument that influences the economy by regulating liquidity and inflation. The Reserve Bank of India (RBI) carefully monitors and updates the repo rate to ensure stability and balance in the financial system. From controlling the inflation to stimulating economic growth, the repo rate is an important factor that influences India’s monetary policy. By adjusting the repo rate, RBI effectively manages the borrowing costs for individuals and businesses, ultimately impacting the spending and investment decisions in the economy.