What is REPO Rate?

REPO rate is the rate of interest at which the central bank of India, i.e. Reserve Bank of India (RBI), lends money to the commercial banks. In case of a financial crisis, the commercial banks can lend money from the Reserve Bank of India and the rate of interest at which the money is provided is called the repo rate.

Repo rate is used by the central bank to control the money supply in the market. In turn, this helps in controlling inflation and helps regulate the economy.

RBI Repo Rate 11 Apr 2021

Repo Rate4.00%
Bank Rate4.65%
Reverse Repo Rate3.35%
Marginal Standing Facility Rate4.65%

RBI Repo Rate Cut History 2020 -2005

The change in repo rate in India since October 2005 can be summed up as follows:

Effective DateRepo Rate%Change
09 Oct 20204.00%0.00%
06 Aug 20204.00%0.00%
22 May 20204.00%0.40%
27 March 20204.40%0.75%
6 February 20205.15%0.25%
07 August, 20195.40%0.35%
06 June, 20195.75%0.25%
04 April, 20196.00%0.25%
07 February, 20196.25%0.25%
01 August, 20186.50%0.25%
06 June, 20186.25%0.25%
02 August, 20176.00%0.25%
04 October, 20166.25%0.25%
05 April, 20166.50%0.25%
29 September, 20156.75%0.50%
02 June, 20157.25%0.25%
04 March, 20157.50%0.25%
15 January, 20157.75%0.25%
28 January, 20148.00%-0.25%
29 October, 20137.75%-0.25%
20 September, 20137.50%-0.25%
03 May, 20137.25%-0.50%
17 March, 20116.75%-0.25%
25 January, 20116.50%-0.25%
02 November, 20106.25%-0.25%
16 September, 20106.00%-0.25%
27 July, 20105.75%-0.25%
02 July, 20105.50%-0.25%
20 April, 20105.25%-0.25%
19 March, 20105.00%-0.25%
21 April, 20094.75%0.25%
05 March, 20095.00%0.50%
05 January, 20095.50%1.00%
08 December, 20086.50%1.00%
03 November, 20087.50%0.50%
20 October, 20088.00%1.00%
30 July, 20089.00%-0.50%
25 June, 20088.50%-0.50%
12 June, 20088.00%-0.25%
30 March, 20077.75%-0.25%
31 January, 20077.50%-0.25%
30 October, 20067.25%-0.25%
25 July, 20067.00%-0.50%
24 January, 20066.50%-0.25%
26 October, 20056.25%00.00

How does Repo Rate work?

As mentioned earlier, the repo rate is used by the central bank of India to control the flow of money in the market. When the market is hit by inflation, RBI increases the repo rate. An increased repo rate denotes that the banks who borrow money during this period from the central bank will have to pay higher interest. This discourages the banks to borrow money, which in turn, reduces the supply of money in the market and helps negate the inflation. Similarly, the repo rates are decreased in the case of a recession.

How does RBI calculate Repo Rate?

On the basis of the economic condition, as discussed in the last paragraph, the RBI regulates the repo rate. The rates are decided by the central bank on the basis of the inflation or recession in the market of the country.

Repo Rate vs Reverse Repo Rate

Repo Rate vs Reverse Repo Rate is one of the most important topics that we need to understand. The difference can be listed as follows:

  1. Repo rate is charged against funds lent by the RBI to commercial banks and other financial institutions. The reverse repo rate, on the other hand, is the rate of interest which is offered by the central bank to the commercial banks who deposit funds in the RBI treasury.
  2. Repo rate is always higher than the reverse repo rate.
  3. Repo rate helps to control the inflation in the market. The reverse repo rate, on the other hand, helps to control the supply of money in the market.

What is the difference between the Repo rate and the MCLR rate?

Marginal Cost of funds based Lending Rate or MCLR is a reference rate which is used internally for ascertaining the interest rate which can be levied by the banks on loans.

The repo rate, on the other hand, is an interest rate which is determined by the Reserve Bank of India (RBI) and charged against the funds lent by the central bank to commercial banks and all other financial institutions.

What effect does Repo Rate has on the life of a common man?

The effect of repo rate on the life of common man is direct in terms of the increase in the overall interest. As discussed earlier, repo rate is the rate of interest which is charged by the RBI for funds lent to the commercial banks.

When the repo rate increases, the interest rate at which commercial banks borrow money from the central bank increases and the borrowing becomes costlier. In turn, the commercial banks increase their lending rates to cope up with the hike in the repo rate. Thus, when common men borrow money from the commercial banks, the effective interest rate becomes higher and they end up paying higher interest amounts for the loan that they borrow.

What is the relationship between inflation and repo rate?

The repo rate is used by the central bank of India to control the supply of money in the Indian market. A higher repo rate helps in reducing the borrowing power of the commercial banks which, in turn, reduces the flow of cash in the market. This method helps to control inflation.

Let us take an example here. Let us assume that the country has been hit by inflation and the RBI has set the repo rate at 10%. In this case, if a commercial bank is borrowing an amount of Rs.10,000 from the central bank, the interest amount for the same will be Rs.1,000. To avoid paying this higher rate of interest, the commercial banks decide to not borrow further from the RBI which reduces the supply of cash in the market. As the flow of cash reduces in the market, the demand is not met. This helps in checking the inflation and regulating it accordingly.

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