How Does Repo Rate Work in India? (Examples & Effects for Students)
Repo rate is a central concept in Indian banking and monetary policy. It refers to the interest rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks. Knowledge of repo rate helps students prepare for school exams, competitive tests, and understand daily financial news and business decisions.
| Term | Meaning | Current Value (As of 6 June 2025) |
|---|---|---|
| Repo Rate | Rate at which RBI lends to commercial banks against securities | 5.50% |
| Reverse Repo Rate | Rate at which RBI borrows from commercial banks | 3.35% |
| Bank Rate | Rate charged by RBI for long-term loans to banks | 5.75% |
| Marginal Standing Facility (MSF) Rate | Rate for emergency borrowing by banks from RBI | 5.75% |
What is Repo Rate?
Repo rate stands for ‘Repurchase Agreement’ rate. It is the interest rate at which the RBI lends funds to commercial banks for short periods, typically overnight, against government securities. Understanding repo rate is essential for exams and for tracking economic policy changes in India.
How Does Repo Rate Work?
When commercial banks face shortfalls in funds, they approach the RBI and borrow money by selling government securities. They promise to repurchase these securities at a fixed price in the future. The interest RBI charges in this transaction is the repo rate. By adjusting this rate, the RBI directly controls money supply and inflation in the economy.
Repo Rate vs Reverse Repo Rate
Many students confuse repo rate with reverse repo rate. The key difference lies in the direction of funds—repo rate is for borrowing by banks from RBI, while reverse repo rate is for RBI borrowing from banks.
| Criteria | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Definition | Rate at which RBI lends to banks | Rate at which RBI borrows from banks |
| Purpose | Injects liquidity into the system | Absorbs excess liquidity from banks |
| Rate | Always higher than reverse repo | Always lower than repo rate |
| Impact on Economy | Controls money supply and inflation | Controls excess cash with banks |
Historical Repo Rate Chart (2005–2025)
It is helpful for exams to know how repo rate has changed in recent years. Studying repo rate trends gives insights into RBI’s monetary policy decisions.
| Date | Repo Rate (%) | Change |
|---|---|---|
| 6 June 2025 | 5.50 | -0.50 |
| 9 April 2025 | 6.00 | -0.25 |
| 7 February 2025 | 6.25 | -0.25 |
| 6 December 2024 | 6.50 | - |
| 8 June 2023 | 6.50 | - |
| 8 February 2023 | 6.50 | 0.25 |
- Repo rate is reviewed regularly by the RBI’s Monetary Policy Committee.
- Rate changes are used to tackle inflation or boost growth, as needed.
Impact of Repo Rate on Indian Economy
Repo rate changes directly affect loan interest rates, EMIs, inflation, and investment. When RBI raises repo rate, borrowing costs for banks increase, leading to higher lending rates for students, individuals, and businesses. A lower repo rate makes loans cheaper and boosts economic growth.
Example: Effect of Repo Rate Hike
Suppose the repo rate increases from 5.50% to 6.00%. Banks pay more interest to borrow from RBI, so they increase home loan and personal loan rates. Borrowers pay higher EMIs, reducing spending and helping control inflation. This is crucial for understanding banking and economics exam case studies.
Repo Rate and Exam Preparation
Many exam questions ask for “what is repo rate?”, repo vs reverse repo, and impact on the economy. Students should revise repo rate definitions, differences, and current rates. Exploring monetary policy tools such as Monetary Policy Committee, Instruments of Monetary Policy, Reserve Bank of India, and Open Market Operations through Vedantu improves conceptual understanding.
Repo Rate: Key Related Concepts
- RBI monetary policy
- Reverse repo rate
- CRR and SLR
- Marginal Cost of Funds based Lending Rate (MCLR)
- MSF (Marginal Standing Facility)
Learning these terms alongside repo rate supports scoring better in both theoretical and objective Commerce exam questions.
Recommended Reading
- Functions of Commercial Banks – Learn how banks use repo rate in daily operations.
- Money and Banking – Foundation for repo rate, liquidity, and loan concepts.
- Financial Market – See larger market context where repo rate operates.
At Vedantu, we make topics like repo rate easier for students by connecting them to real economic and business scenarios. Explore comprehensive Commerce lessons for effective exam preparation and everyday financial literacy.
In summary, repo rate is the RBI’s main tool for regulating money supply and inflation. It affects loan rates, banking operations, and economic growth. Keep track of the current rate for your exams and daily awareness. Deepen your understanding through Vedantu resources and practice with real-world examples.
FAQs on What is Repo Rate? Concept, Meaning & Impact Explained
1. What does repo rate mean?
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. It's a key tool used by the RBI to manage inflation and liquidity in the Indian economy.
2. What is repo and reverse repo rate?
The repo rate is the rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which the RBI borrows money from commercial banks. The difference between these rates helps the RBI control liquidity.
3. How to calculate repo rate?
The repo rate isn't calculated; it's set by the Monetary Policy Committee (MPC) of the RBI. The MPC considers various economic indicators, including inflation and growth, before deciding on the appropriate repo rate.
4. What is repo rate and CRR?
The repo rate is the interest rate at which the RBI lends to banks, while the CRR (Cash Reserve Ratio) is the percentage of a bank's deposits that it must maintain with the RBI as cash reserves. Both are monetary policy tools used to control liquidity.
5. What is the current repo rate in India?
The current repo rate in India is a dynamic figure, regularly updated by the RBI. To find the most up-to-date information, please check the official RBI website. This rate directly impacts lending rates and economic growth.
6. How does repo rate affect loans?
Changes in the repo rate directly influence lending rates offered by commercial banks. A repo rate cut typically leads to lower interest rates on loans (like home loans), making borrowing cheaper. Conversely, an increase makes borrowing more expensive. This affects EMIs.
7. How does RBI use repo rate to control inflation?
The RBI uses the repo rate to manage inflation. By increasing the repo rate, borrowing becomes more expensive, reducing spending and thus cooling down inflation. A repo rate cut can stimulate the economy.
8. How often does RBI change the repo rate?
The RBI's Monetary Policy Committee (MPC) meets periodically (usually six times a year) to review and adjust the repo rate based on economic conditions. The frequency of changes depends on various economic factors.
9. What is the impact of repo rate on home loan EMIs?
A decrease in the repo rate typically leads to a reduction in home loan EMIs, while an increase results in higher EMIs. This is because banks adjust their lending rates based on the repo rate.
10. What is the difference between repo and reverse repo rate?
The repo rate is the rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which the RBI borrows money from commercial banks. The repo rate is usually higher than the reverse repo rate. This difference is crucial for managing liquidity in the banking system.
11. What is Repo Rate and MSF?
The repo rate is the rate at which the RBI lends money to commercial banks, while the Marginal Standing Facility (MSF) is a facility through which banks can borrow overnight funds from the RBI, but at a higher rate than the repo rate. MSF serves as a safety net during liquidity crunches.
