RBI Hikes Repo Rate

The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points to 5.25% on 5 December 2025, marking the second consecutive rate cut aimed at supporting economic growth amid easing inflation and global uncertainties. While the reverse repo rate remains unchanged at 3.35%, other key policy rates such as the Bank Rate and Marginal Standing Facility (MSF) now stand at 5.55%, with the Standing Deposit Facility at 5.00%. Since the repo rate is a crucial tool used by the RBI to manage liquidity and control inflation, this move has wide-ranging implications. In this article, we examine the latest inflation trends, GDP projections, the impact of the rate cut, and the historical journey of India’s repo rate.

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Key takeaways

• A hike in the repo rate increases loan interest rates, leading to higher EMIs.
• Higher repo rates are favourable for depositors as FD interest rates tend to rise.
• Debt mutual funds may deliver lower returns due to falling bond prices.
• Repeated rate hikes can slow consumer spending and economic growth.

To understand the repo rate, let’s first look at the term itself. “Repo” comes from “Repurchase Option” or “Repurchase Agreement.” The repo rate is the interest rate at which commercial banks borrow money from the Reserve Bank of India (RBI) by pledging securities such as government bonds. These securities are repurchased later at a pre-agreed price.

When the RBI borrows funds from commercial banks, the rate charged is called the reverse repo rate.

The RBI uses tools like the repo rate, reverse repo rate, Statutory Liquidity Ratio (SLR), and Marginal Standing Facility (MSF) as part of its monetary policy to manage liquidity and control money supply in the economy.

Commercial banks typically borrow from the RBI to meet short-term funding needs, sometimes even for overnight requirements.

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Here's a list of changes in repo rate in India since 2005:

When you borrow money from a bank, you pay interest on the amount borrowed—this is essentially the cost of credit. In a similar way, banks may borrow funds from the Reserve Bank of India (RBI) to manage short-term liquidity needs, and the interest they pay on such borrowing is known as the repo rate.

The term “repo” comes from the Repurchase Agreement. Under this arrangement, banks obtain short-term funds from the RBI by pledging approved securities such as Treasury Bills. These securities are sold to the RBI with an agreement to buy them back at a fixed price on a specified date. This ensures banks receive liquidity while the RBI holds the securities as collateral.

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Impact of a Repo Rate Hike on Different Areas

When the Reserve Bank of India (RBI) increases the repo rate, it influences multiple segments of the economy and investment landscape. Here’s a simplified look at its likely impact:

Impact on economic growth

Frequent repo rate hikes over a short period, though necessary to control inflation, can unintentionally slow economic growth. Higher borrowing costs reduce spending on goods and services, which weakens demand and may dampen overall growth. Rising prices can also strain lower-income groups, making essential goods and services less affordable.

Impact on inflation

Repo rate hikes are primarily aimed at curbing inflation. While there is a risk of slower growth or temporary stagnation if inflation remains persistent, higher rates are expected to cool price pressures over time. As inflation moderates, the RBI may pause further hikes, especially if the economy approaches a peak in the interest rate cycle.

Impact on loans and EMIs

An increase in the repo rate usually leads banks to raise lending rates. This results in higher EMIs for existing borrowers and makes new loans costlier. Home loans, personal loans, vehicle loans, education loans, business loans, and credit cards are all affected. Higher borrowing costs discourage discretionary spending, influencing both demand and supply across the economy.

Impact on deposits and fixed deposit rates

Rising repo rates are generally positive for depositors. Banks tend to increase interest rates on savings accounts and fixed deposits, benefiting investors with short- to medium-term horizons. However, the transmission of higher rates to deposits may take some time, as banks gradually adjust their offerings.

Impact on mutual funds

Debt mutual fund investors need to be cautious during a rate hike cycle. Rising interest rates reduce bond prices, which can negatively impact long-duration debt funds in particular. This often leads to short- to medium-term volatility, prompting some investors to exit and wait for bond prices to stabilise before reinvesting.

Impact on savings

Higher interest rates are favourable for individuals relying on savings and fixed deposits. As repo rates rise, returns on these instruments tend to improve, offering better income opportunities for conservative investors.

Impact on consumer spending

When borrowing becomes expensive, consumers postpone or avoid large purchases, leading to reduced demand for goods and services. This disrupts supply-demand dynamics and can push prices higher, making essentials less accessible for vulnerable sections of society. However, as inflation eases over time, purchasing power is expected to improve, supporting a gradual recovery in consumption.

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Repo rate decisions by RBI play a crucial role in shaping borrowing costs, savings returns, and overall economic momentum. While higher rates increase EMIs and slow spending, they also create attractive opportunities for disciplined savers.

In such environments, Bajaj Finance Fixed Deposits stand out as a reliable option—offering competitive interest rates, strong credit ratings, flexible tenures, and assured returns. Whether you’re balancing rising EMIs or planning stable growth, aligning your savings with the interest rate cycle can make a meaningful difference. Book FD.