Current Repo Rate in India
The Reserve Bank of India (RBI) raised the repo rate by 25 basis points on February 8, 2023. The current repo rate stands at 6.50% as per the recent update.
What is repo rate?
Repo Rate full form or the term ‘REPO’ stands for ‘Repurchasing Option’ Rate. It is also known as the ‘Repurchasing Agreement’ and is the interest rate at which the central bank of the country lends money to recognized commercial banks to achieve several fiscal goals for the economy. The term ‘REPO’ denotes ‘repurchase option or agreement.’ Used as a tool in the financial market, it facilitates borrowings through collateral of specific debt instruments in the economy.
Commercial financial institutions in India can borrow money from the Reserve Bank of India (RBI) for a set period of time. They can do this by providing government bonds, treasury bills, and similar securities as collateral. The RBI sets the interest rate for these loans based on its policies.
As borrowers, these financial institutions pay interest to the RBI as per the applicable repo rate. At the tenure’s end, they can repurchase these bonds from RBI by repaying a predetermined price. As a monetary tool, the repo rate primarily serves to keep inflation in check apart from fulfilling other monetary requirements.
Moreover, changes in the rate can impact other rates such as home loan interest rates and bank deposit rates. The Monetary Policy Council (MPC) meeting, headed by the RBI Governor, takes the decision regarding the current repo rate.
RBI rate March 2023
Type of Rate |
Current Rate |
Repo Rate |
6.25% |
Bank Rate |
6.50% |
Reverse Repo Rate |
3.35% |
Marginal Standing Facility Rate |
6.50% |
When was the RBI repo rate changed?
On Feb 8, 2023, RBI's MPC increased repo rate by 25 bps to 6.50%.
The trend of Repo Rate updates by the Reserve Bank of India.
Last Update Date |
RBI Repo Rate |
February 8, 2023 |
6.50% |
December 7, 2022 |
6.25% |
September 30, 2022 |
5.90% |
August 5, 2022 |
5.40% |
June 8, 2022 |
4.90% |
May 4, 2022 |
4.40% |
October 9, 2020 |
4% |
August 6, 2020 |
4% |
May 22, 2020 |
4% |
March 27, 2020 |
4.40% |
February 6, 2020 |
5.15% |
December 5, 2019 |
5.15% |
October 10, 2019 |
5.15% |
August 7, 2019 |
5.40% |
June 6, 2019 |
5.75% |
April 4, 2019 |
6.00% |
February 7, 2019 |
6.25% |
August 1, 2018 |
6.50% |
Jun6 6, 2018 |
6.25% |
August 2, 2017 |
6.00% |
October 4, 2016 |
6.25% |
April 5, 2016 |
6.50% |
September 29, 2015 |
6.75% |
June 2, 2015 |
7.25% |
March 4, 2015 |
7.50% |
January 15, 2015 |
7.75% |
January 28, 2014 |
8.00% |
Availing loans from financial institutions attracts interest payment on the principal amount. The interest, along with any other charges, comprises the total cost of credit.
How does repo rate work?
The application of repo rates is based on the same concept and works in line with this borrowing-lending functionality. While financial institutions lend money to the public, they also need to borrow money during fund shortages/ financial crunch.
RBI fulfils this requirement of commercial financial organisations by initiating a repo transaction, i.e. lending money, and charging interest as per the existing repo rate.
The repo transaction completed between RBI and any commercial bank comprises specific components listed below:
- Financial institutions must provide RBI with eligible security that the RBI recognises and that exceeds the Statutory Liquidity Ratio (SLR) limit when borrowing.
- Loans provided to commercial lenders can be as per overnight or term agreements.
- The applicable RBI repo rate charges interest on the loan amount.
- On loan repayment, financial lenders repurchase the security provided to RBI as collateral.
There are multiple ways money circulates through the economy, and one of the most significant channels is through commercial banks. When the central bank changes the repo rate, it can have an impact on the cost of credit for financial companies. This change in cost can, in turn, affect the lending policies of financial companies, leading to changes in the interest rates at which they offer loans to the public.
Impact of repo rate cut
RBI reduced the repo rate due to a drop in liquidity in the country's money market. It impacts economic aspects that increase the flow of money, making finances more readily available to the public.
Since commercial financial institutions can obtain loans from RBI at reduced rates, they extend the advantages of decreased interest rates to their customers. One can consequently avail of different types of loans at a lower cost of credit. An overall increase in affordable finances allows borrowers to avail of loans of a higher amount and spend more, thus increasing monetary flow.
Check the below-listed impacts of cuts in repo rates
- Availability of loans to consumers at cheaper rates
- Increase in affordability
- Increased ticket size of loans from retail consumers, thus improving liquidity
- Significant growth in the economy’s overall consumption
- Increased consumption, driving the economy toward growth
The RBI cuts repo rates to increase liquidity and stimulate economic growth when necessary. On the other hand, increased liquidity can also pose challenges for the economy in the form of inflation. For this reason, central banks initiate rate cuts in smaller percentages such as 25 bps or 0.25%.
Importance of repo rate
- The importance of repo rate extends to its effects on various aspects of a country’s economy
- The RBI uses it as a control mechanism to infuse or decrease liquidity in the financial system
- Repo rate change affects bank funding costs and thus impacts retail lending policies
- Repo rate cuts aid inflation control and price stability in finance
- Change in repo rates affects other rates like home loan interest rates, rates on bank deposits, etc
Commercial lending companies are offering loans and advances at reduced rates due to the current trend of rate cuts. It increases competition in the market, thus encouraging other financial institutions to reduce interest rates on various credits.
As an NBFC, Bajaj Finserv offers secured loans like home loans and other unsecured advances at attractive interest rates for increased affordability and convenient repayment.
Frequently Asked Questions
Repo rate serves as an effective financial tool and helps in monitoring the country’s liquidity, money supply and inflation levels. All these factors tend to be directly proportional with the rise and fall of the repo rate due to its direct relationship with the cost of borrowing for financial institutions.
Consequently, its primary effects on the economy are as follows:
- Effective regulation in the inflation level of the economy.
- Increase or decrease in the economy’s money supply.
- Increased or decreased overall consumption.
- Effect on cash availability for retail consumers.
- Overall economic growth.
As the repo rate significantly impacts the economy, the RBI makes sure to use it as a tool to regulate the financial market and formulates its Monetary Policy accordingly.
With an increase in repo rate, the cost of credit increases for commercial banks, thus making loans expensive for them. It limits their capacity to borrow and also prompts them to increase the rate of interest offered to retail borrowers for various loans and advances.
As bank loans become expensive for customers, it discourages them from borrowing more. It results in an overall decrease in money supply to the market, impacting the liquidity. A decreased availability of money tends to contain inflation. It is the primary reason why the RBI resorts to increasing this rate during periods of high inflation.
Similar to repo rates, another market instrument RBI uses to control and regulate the money market is reverse repo rate. It is a rate at which commercial lending organisations deposit their surplus cash to the RBI and earn interest. Unlike repo rates, these rates carry an inverse relationship with the economy’s money supply.
The Narasimhan Committee on Banking Sector Reforms recommended the introduction of repo rates as a part of Liquid Adjustment Facility (LAF) in 1998. Simultaneously, the concept of repo rates was introduced in RBI’s Monetary Policy.
As per these policies, repo rate is primarily used to control and regulate the available liquidity in India’s economic system. An increase in these rates limits the availability of liquidity, thus curbing a surge in inflation as well as bringing it down.
Alternatively, any reduction in this rate enables increased borrowings for commercial lenders as a result of reduced cost of credit. The recent Monetary Policy regarding cuts in repo rates has been in line to increase liquidity in the financial system, thus driving economic growth.
Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks and lenders. This rate is decided by the RBI and is always less than the Repo Rate. The act of borrowing money by the RBI is a reactionary measure to curb the excess liquidity in the market observed during high levels of inflation. This encourages banks to park their money with the central bank and extend less funds to borrowers.
During high levels of inflation, increasing the repo rate is a considerable measure that helps control inflation. A rise in repo rate translates into increased rate of interest on loans extended by commercial banks to the lenders. This makes borrowing money expensive particularly for businesses and industries, which slows down production, investment and the overall supply of money in the market - subsequently bringing down inflation.
Repo rates are beneficial for the economy in general to control inflation and deflation. When Repo rate reduces, it allows commercial banks and lenders to borrow money from RBI at a lower interest rate. This benefit is then passed on to their customers by reducing the interest rates on the loans they offer. It also decreases the cost of commodities considering industries and businesses also borrow at a lowered rate of interest.
As an end consumer, a decrease in repo rate would mean you get to borrow a loan at a lowered rate of interest. Which means you have to shell out less money as EMIs while you enjoy the same amount of principal value. On the other hand, if repo rate increases, your floating rate of interest would automatically be increased and so would your EMIs.
