What is Repo Rate? | RBI's Magic Wand
The most powerful tool in the RBI's arsenal. Learn how a change in Repo Rate affects your EMIs, inflation, and the entire banking system.
The Definition
Repo Rate (Repurchase Option) is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks in the event of any shortfall of funds. It is used by monetary authorities to control inflation and liquidity.
How it works: Commercial banks sell government securities to the RBI with an agreement to repurchase them at a later date at a predetermined price. The interest paid on this borrowing is the Repo Rate.
Relationship with Inflation
Increase in Repo
When RBI wants to control high inflation, it increases the Repo Rate. Borrowing becomes expensive for banks.
Result: Less Money Supply → Low Inflation
Decrease in Repo
When RBI wants to stimulate economic growth, it decreases the Repo Rate. Borrowing becomes cheaper.
Result: More Money Supply → Higher Growth
Impact on the Common Citizen
The Repo Rate has a direct impact on the interest rates of loans offered by commercial banks (like Home Loans, Car Loans, etc.).
Loan EMIsDirectly Linked
FD Interest RatesUsually Follows Repo
Stock MarketInverse Relationship
Explore Repo Rate Timeline
See how Repo Rate changed during the last decade.