What is a Repo Rate?

Repo rate, also known as the repurchase rate, is the interest rate at which the central bank (such as the Reserve Bank of India in the case of India) lends shortterm funds to commercial banks. It is an essential monetary policy tool used by the central bank to control inflation, manage liquidity in the financial system, and stimulate or regulate economic growth.

When commercial banks need funds, they can borrow from the central bank by selling government securities (bonds) in the repo market. The central bank sets the repo rate, which determines the cost at which banks can borrow funds. By increasing or decreasing the repo rate, the central bank influences the cost of borrowing for banks, affecting their lending rates to customers.

If the central bank raises the repo rate, borrowing becomes more expensive for banks. This, in turn, encourages banks to increase their lending rates to customers, which can help control inflation by reducing consumer spending and credit expansion. Conversely, if the central bank lowers the repo rate, borrowing becomes cheaper, encouraging banks to lower their lending rates and stimulate economic activity.

The repo rate is a crucial factor that impacts interest rates across the economy, including home loans, car loans, business loans, and other forms of credit. Changes in the repo rate can influence borrowing costs, investment decisions, and overall economic conditions.