Glossary term
Repo Rate: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The repo rate is the interest rate at which the Reserve Bank of India lends short-term funds to commercial banks against government securities, which the banks agree to repurchase. It is the main policy rate. A higher repo rate makes borrowing costlier for banks and tends to raise lending rates.
In more detail
The repo rate works through the cost of credit. When it rises, banks pay more for funds and pass the cost on, so borrowing for homes, vehicles and business becomes dearer and demand slows. When it falls, credit gets cheaper. The RBI uses it to keep inflation near its target while supporting growth. Quote the current rate only from an RBI source.
Example
If the RBI raises the repo rate from 6 to 6.5 per cent, a bank paying more to borrow from the RBI usually raises its own loan rates, and loans and spending slow down.
Key points
- Set by the Monetary Policy Committee.
- Raising it cools demand and inflation; cutting it supports growth.
- The reverse repo rate is what the RBI pays banks that park funds with it.
Common mistake
Calling the repo rate the rate banks charge customers. It is the rate banks pay the RBI.
Related terms
Cash reserve ratioStatutory liquidity ratio
Where it is explained
This term is explained in Class 12 Macroeconomics Chapter 3: Money and Banking.