RBI Repo Rate: All You Need To Know

The Repo Rate is the interest rate at which the Reserve Bank of India (RBI)  lends money to commercial banks. It stands for Repurchase Agreement or Repurchasing Option. Banks borrow funds from the RBI by selling qualifying securities. An agreement is made between the central bank (RBI) and the commercial bank to repurchase the securities at a set price. When banks require funds urgently or need to manage liquidity during uncertain market conditions, this is done. The RBI uses the repo rate to manage inflation. 

How Repo Rate Works: 

As mentioned earlier, the repo rate is employed by the Indian central bank to restrict the flow of money in the market. When inflation affects the market,  the RBI raises the repo rate. A higher repo rate implies that banks borrowing money from the central bank during this period will have to pay more interest. This discourages banks from borrowing money, thereby decreasing the money supply in the market and helping to negate inflation. During a recession, RBI repo rates are also reduced.

According to the government's announcement on February 8, 2024, the current repo rate in India has been set at 6.50 per cent. 

According to the state of the economy,  the Reserve Bank of India (RBI) from time to time adjusts the repo rate. Almost every sector of the economy is impacted by the changes in interest rates. While most banks have adopted an RLLR (Repo Rate Linked Lending Rate), when the repo rate changes, banks are directed by RBI to change the interest rate applicable on various loans accordingly. Usually, when the repo rate is lowered, there is a reduction in the interest rates charged on home loans, EMIs, etc., making it easier for customers to avail loans or borrow from banks. This move, in turn, supports the economic growth of the country. It’s important to understand that while changes in repo rates are meant to influence commercial bank interest rates, the actual rates applicable for the customer may vary from bank to bank and it is also dependent on several factors such as terms of the loans such as the amount being borrowed, tenure of repayment, etc. 

Repo, short for 'repurchase option' or 'repurchase agreement,' is a kind of short-term borrowing that allows banks or financial institutions to borrow money from others against government securities with a pact to buy back those securities after a definite time-period and at a predetermined price (which is higher than the initial sell price). This is a secure way of raising short-term capital for banks.