What is Repo Rate? Meaning, Importance and How it works

The repo rate is an important tool used by the Reserve Bank of India (RBI) to manage the flow of money in the economy. It directly affects how much interest banks charge on loans and offer on deposits. When the RBI changes the repo rate, your loan EMIs can go up or down, and the returns on your savings can also be influenced. Understanding the current repo rate helps you see how these changes might affect your personal finances and spending decisions.

What is repo rate?

The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities. When the repo rate increases, borrowing becomes more expensive for banks, which may lead to higher interest rates on loans like personal, car, or home loans. Conversely, a lower repo rate reduces borrowing costs, allowing banks to offer loans at cheaper rates. The RBI uses the repo rate as a key tool to manage inflation, regulate money flow, and maintain overall economic stability.

How does the repo rate work?

• The repo rate is the rate at which the RBI lends short-term funds to banks against government securities.
• Banks use this option when they need additional liquidity to manage daily operations.
• When the RBI raises the repo rate:
  • Borrowing from the RBI becomes more expensive for banks.
  • Banks may respond by increasing the interest rates on loans offered to customers.
• When the RBI lowers the repo rate: 
  • Banks can access funds at a lower cost.
  • This often encourages banks to reduce interest rates on loans.
• The RBI adjusts the repo rate to manage inflation, money supply, and overall financial stability in the country.

What is the current repo rate in India?

The current repo rate in India is 5.25%, revised after a recent rate cut by the Reserve Bank of India. This is the rate at which the RBI provides short-term funds to commercial banks against government securities, helping them manage day-to-day liquidity needs. The reverse repo rate, which is the rate at which banks deposit their surplus funds with the RBI, remains at 3.35%. Both these policy rates directly influence loan interest rates, inflation control, and overall liquidity in the financial system. The RBI’s Monetary Policy Committee reviews these rates regularly and adjusts them based on changing economic conditions and inflation trends to maintain financial stability.

Reserve Bank of India repo rate

The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks when they need short-term funds. In return, banks give government securities as collateral. This rate plays a key role in the country’s economy. It affects how much banks charge us for loans, helps the RBI keep inflation in check, and ensures there’s enough liquidity (cash flow) in the financial system. As of December 2025, the current repo rate is 5.25%, after the RBI reduced it to support growth and maintain price stability.

Repo Rate Today	5.25%
Reverse Repo Rate	3.35%

 

Historical repo rates from 2010 to 2025

Here's a table showing the historical repo rates set by the Reserve Bank of India (RBI) from 2010 to 2025. These rates reflect the RBI's response to various economic conditions over the years and tracking the repo rate effect can reveal several insights.

Year	Repo Rate (%)
2025	5.25
2024	6.5
2023	6.25
2022	4.40 – 5.90
2021	4
2020	4
2019	5.15 – 6.25
2018	6.25 – 6.50
2017	6
2016	6.5
2015	6.75
2014	7.75 – 8.00
2013	7.25 – 8.00
2012	8.00 – 8.50
2011	6.50 – 8.50
2010	5.25 – 6.25

 

Why is the repo rate important?

The repo rate plays a big role in how money moves in the economy. Here’s why it matters:

1. It affects loan interest rates

If the repo rate increases, borrowing becomes costlier for banks—and for you. Loan EMIs can go up. If it drops, loans may get cheaper.

2. It helps control inflation

When inflation is high, the RBI raises the repo rate to make borrowing expensive. This slows down spending. When inflation is low, the RBI can lower the rate to boost demand.

3. It supports economic growth

Lower repo rates make loans more affordable, which helps businesses grow and encourages people to spend more—giving the economy a push.

4. It impacts investments and savings

Changes in the repo rate also affect returns on savings and investments. So staying updated helps you make better financial decisions.

How does RBI calculate repo rate?

The RBI calculates the repo rate based on several economic factors to control inflation and support economic growth. Key considerations include:

1. Inflation trends: High inflation generally prompts the RBI to increase the repo rate, while low inflation may lead to a reduction.
2. Economic growth: The repo rate is adjusted to balance economic growth with inflation control, ensuring stability.
3. Liquidity and banking needs: The demand for loans and the money supply influence repo rate adjustments.
4. External economic influences: Global factors like commodity prices and international market fluctuations also impact the decision.

The RBI evaluates these factors during its regular monetary policy reviews to determine the most appropriate rate.

What is reverse repo rate?

The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks, usually by offering government securities in return.

When banks have extra money lying around, they can lend it to the RBI and earn interest at this rate. This gives banks a safe option to park their surplus funds instead of giving out more loans.

By doing this, the RBI can reduce the amount of money flowing in the system, which helps keep inflation in check. In simple terms, the reverse repo rate helps the RBI manage how much cash is available in the economy and keep things stable.

What is the difference between repo rate and reverse repo rate?

The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends funds to commercial banks against government securities, helping manage inflation. The reverse repo rate is the interest paid by the RBI to banks on their surplus deposits, helping control liquidity in the economy. While the repo rate generates income by lending to banks, the reverse repo earns interest on deposits. The reverse repo rate is always lower than the repo rate.

Here is a summary of repo rate vs reverse repo rate:

Aspect	Repo rate	Reverse repo rate
Role	Injects liquidity into the economy	Absorbs excess liquidity
Who benefits?	Banks borrowing funds from RBI	Banks depositing surplus funds with RBI
Impact on lending	Directly influences loan interest rates	Indirectly influences liquidity availability
Monetary policy tool	Used mainly to control inflation and stimulate growth	Used mainly to control liquidity and stabilize money supply
Effect on money supply	Increases money supply when rate is low	Decreases money supply by absorbing excess funds
Central bank income	RBI earns interest by lending funds	RBI pays interest to banks on deposits
Economic effect	Higher repo rate slows down economy	Higher reverse repo rate encourages banks to save more

 

What is affected by a change in repo rate?

A change in the repo rate can impact several key areas of the economy:

1. Loan costs: Higher repo rate means costlier loans and EMIs; a lower rate makes borrowing cheaper.
2. Inflation: Raising the rate helps control inflation; lowering it boosts spending.
3. Investments: Low rates push money to stocks; high rates favour fixed deposits.
4. Currency strength: A higher rate attracts foreign investment, strengthening the rupee.

These factors collectively shape the economic environment, influencing everything from individual borrowing costs to national growth rates.

Impact of repo rate on consumers

Changes in the repo rate have a direct effect on consumers in several ways:

1. Loan costs: A rise in the repo rate increases the interest rates on loans like home loans, personal loans, and car loans, making borrowing costlier for consumers. Conversely, a decrease in the repo rate lowers loan costs, encouraging borrowing and investment.
2. Savings returns: When the repo rate increases, banks tend to offer higher interest rates on deposits, benefiting savers. Lower repo rates may reduce returns on savings.
3. Inflation: The repo rate influences inflation; an increase typically helps control rising prices, while a reduction can increase demand, potentially leading to inflationary pressures.

In essence, consumers' borrowing and saving patterns are significantly influenced by fluctuations in the repo rate.

What is the relationship between inflation and repo rate

The repo rate and inflation are closely linked.

1. When inflation is high, the RBI increases the repo rate. This makes loans more expensive, so people borrow and spend less. As a result, inflation comes down.
2. When inflation is low, the RBI lowers the repo rate. This makes loans cheaper, encouraging people to borrow and spend more—giving the economy a boost.

In short, the RBI uses the repo rate to keep inflation under control and maintain economic balance.

How repo rate impacts personal loan EMI?

The repo rate primarily affects loans with floating interest rates, while personal loans are often offered at fixed rates. This means that existing personal loan borrowers may not feel the impact immediately after a repo rate change.

When the RBI increases the repo rate, banks and NBFCs face higher borrowing costs. To maintain profit margins, they usually raise personal loan interest rates, which increases EMIs for borrowers. Conversely, when the RBI lowers the repo rate, banks can borrow at lower costs and may offer personal loans at reduced interest rates, making EMIs more affordable.

It is important to note that repo rate changes do not affect personal loan EMIs immediately. Banks take some time to revise interest rates after the RBI announces a change. Borrowers should monitor repo rate movements and maintain a good credit score and repayment history to secure personal loans at better interest rates when rates are favourable.

How repo rate impacts fixed deposits?

The repo rate influences fixed deposit interest rates. When the central bank raises the repo rate, banks may increase fixed deposit rates to attract funds, offering better returns to depositors. Conversely, a lower repo rate might lead to lower fixed deposit rates, impacting returns for investors.

How repo rate affects economy?

The repo rate impacts the economy by influencing interest rates. A higher repo rate can lead to increased borrowing costs, slowing economic activity and inflation. Conversely, a lower repo rate stimulates borrowing, promoting spending and investment. Central banks use repo rate adjustments as a tool to achieve monetary policy objectives and economic stability.

1. Controlling Inflation: When prices start rising too fast, the RBI raises the repo rate. This makes loans more expensive, so people and businesses tend to borrow and spend less, which helps slow down inflation.
2. Boosting growth: On the other hand, when the economy needs a push, the RBI lowers the repo rate. Cheaper loans encourage businesses and individuals to borrow, invest, and spend more, giving the economy a much-needed boost
3. Liquidity management: The repo rate helps the RBI control the availability of funds in the banking system. An increased repo rate reduces liquidity, while a lower rate increases it.
4. Investment patterns: Lower repo rates can attract investors to equities and real estate as they seek higher returns, while higher rates can shift investments to safer, fixed-income options.
5. Loan repayment costs: A high repo rate makes loans costlier, affecting EMIs on home, personal, and auto loans, which can impact household budgets and consumption.

How repo rate affects stock market?

The repo rate influences the stock market by affecting borrowing costs. When the central bank raises the repo rate, it can increase interest rates, making borrowing more expensive for businesses. This may impact corporate earnings and stock valuations, potentially leading to market adjustments. Conversely, a lower repo rate may stimulate economic activity and benefit stocks.

Use the personal loan EMI calculator to swiftly calculate your monthly payments on personal loans.

Conclusion

The repo rate is an important tool the RBI uses to manage inflation, encourage investment, and support economic growth. By raising or lowering the repo rate, the RBI can either slow down or speed up economic activity as needed. Along with the reverse repo rate, it helps control the flow of money in the market, affecting loan interest rates and the overall health of the economy. Knowing how the repo rate works can help borrowers and investors make smarter choices about loans and investments.