Repo rate

Also called: Policy repo rate, Policy rate, Repurchase agreement, Repo · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to banks for a short time. The RBI buys a bank's government securities, and the bank promises to buy them back on a fixed date at a fixed price. It is the RBI's main policy rate, so changes in it affect loan rates, spending and inflation across the economy.

Formula (interest on a repo loan): Interest = Amount borrowed × Repo rate × (Number of days ÷ 365)

Explanation

How a repo works

• Repo is short for repurchase agreement.
• A bank needs cash, so it sells government securities (G-secs) to the RBI.
• At the same time, the bank promises to buy them back on a fixed date at a fixed price.

• The gap between the selling price and the buy-back price is the interest. This interest, shown as a yearly rate, is the repo rate.

• The securities act as collateral (a guarantee). If the bank does not pay, the RBI keeps the securities.

• It is a reversible injection of liquidity (ready cash in the banking system). The money goes out to banks and comes back when the term ends.
• Tenors (how long the loan lasts): overnight, 7-day or 14-day.
• The repo rate has been the single policy rate since 2011. All other short-term RBI rates are set with reference to it.

Worked example

• A bank borrows ₹1,000 crore overnight at a repo rate of 5.25% (August 2026).
• Interest = 1,000 × 0.0525 ÷ 365

• ≈ ₹0.144 crore ≈ ₹14.4 lakh.

• If the repo rate is cut, the bank pays less interest on the same loan, so it can lend to its customers more cheaply.

Where it sits: the LAF corridor

• The repo rate is part of the Liquidity Adjustment Facility (LAF), the RBI's daily system for adding cash to the banking system and taking it out [2].
• The corridor is a band around the repo rate. It keeps short-term market rates close to the repo rate:
• Floor = Standing Deposit Facility (SDF) (where banks park extra cash with the RBI) = repo − 25 bps [5].
• Ceiling = Marginal Standing Facility (MSF) (emergency overnight borrowing at a higher rate) = repo + 25 bps [5].
• 1 basis point (bp) = 0.01 percentage point.

Rate (August 2026)	Level
SDF (floor)	5.00%
Repo (policy rate)	5.25%
MSF / Bank rate (ceiling)	5.50%

• Width of the corridor = 50 bps [2].

What a change in the repo rate does

• Repo rate cut (expansionary policy)
• Banks borrow from the RBI more cheaply → banks cut their loan rates.
• People and firms borrow more → spending and investment rise.

• Demand rises → growth gets support.

• Repo rate hike (contractionary policy)

• Banks' borrowing costs rise → loans become costlier.
• People and firms borrow and spend less → demand falls.

• Prices cool → inflation comes down.

• What pushes the RBI to raise or cut it:

• Inflation above the target → pressure to raise.
• Weak growth or a shock (like COVID) with inflation under control → room to cut.

In India

• Who sets it: the Monetary Policy Committee (MPC) under RBI Act s.45ZB, not the Governor alone [5].

• 6 members: 3 from the RBI (Governor as Chair, the Deputy Governor in charge of monetary policy, and one officer nominated by the Central Board) and 3 external members with a 4-year term [5].

• What it aims at: price stability "while keeping in mind the objective of growth" (RBI Act preamble, amended 2016) [5].

• The inflation target (s.45ZA) is CPI 4%, with an upper limit of 6% and a lower limit of 2%. It is set by the Central Government in consultation with the RBI [5].

• It was renewed on 25 March 2026 for 1 April 2026 to 31 March 2031 [5].

• Operating target: the RBI tries to keep the weighted average call rate (WACR) (the average rate at which banks lend to each other overnight) close to the repo rate. It does this by adding or taking out liquidity [5].

• Recent path of the repo rate:
• 2019-20: cut to 4% by May 2020 (COVID shock).
• May 2022 to February 2023: raised by 250 bps, from 4% to 6.5%.
• 2025: cut from 6.5% to 5.25% by December 2025, a total of 125 bps.
• 2026: kept unchanged at the 60th meeting (6-8 April 2026) and the 61st meeting (3-5 June 2026) [3].
• Latest (August 2026): the MPC voted unanimously to keep it at 5.25%, with a neutral stance [2].

Don't confuse with

• Reverse repo / SDF: a repo injects cash into banks (RBI lends). A reverse repo or the SDF absorbs cash (banks park money with the RBI). Since April 2022, the SDF (5.00% in August 2026), not the fixed-rate reverse repo, is the floor of the corridor [2].
• Bank rate: the RBI lends or rediscounts bills without repo collateral. Today it is aligned with the MSF (5.50%, August 2026) and is used mainly for penal charges, not as the policy signal [2].
• MSF: also an overnight RBI loan, but it is the emergency ceiling at repo + 25 bps [5]. The repo rate is the normal policy rate in the middle of the corridor.
• Outright OMO: a permanent purchase or sale of G-secs that changes durable liquidity [5]. A repo is temporary, because it reverses after overnight, 7 or 14 days.

Prelims Hooks

• Repo = the RBI buys a bank's securities with a promise that the bank will buy them back. It is a temporary injection of liquidity for overnight, 7 or 14 days.
• The repo rate is set by the 6-member MPC (RBI Act s.45ZB) with the Governor as Chair. The inflation target is set by the Central Government (s.45ZA) [5].
• The operating target is the WACR, not the repo rate itself [5].
• Corridor (August 2026): SDF 5.00% < Repo 5.25% < MSF = Bank rate 5.50%, a width of 50 bps [2].
• Trap: a repo rate cut is expansionary (money supply rises). A repo rate hike is contractionary.
• Cycle to remember: 4% (May 2020) → 6.5% (Feb 2023, +250 bps) → 5.25% (Dec 2025, −125 bps) → held at 5.25% with a neutral stance (Aug 2026) [2].

Mains Points

• Inflation vs growth trade-off: after raising the rate by 250 bps in 2022-23, the RBI cut it by 125 bps in 2025 and then held at 5.25% with a neutral stance in 2026 [2][3]. Cutting too early can bring inflation back. Holding rates high for too long can slow growth. This is the balance the RBI Act asks for when it says price stability "while keeping in mind" growth [5].
• Slow transmission: a repo cut helps only if banks pass it on to borrowers.
• Banks have already promised fixed rates to their deposit holders, so they are slow to cut loan rates.

• This is why the RBI also cut the CRR by 100 bps in 2025, down to 3% of NDTL. This freed cheap funds that banks could lend [4].

• Rule-based accountability (GS-II link): the repo rate is decided by a statutory MPC working towards a legal inflation target. Missing the target has a legal definition: average inflation above 6% or below 2% for three quarters in a row [5]. This makes the RBI answerable for its decisions and keeps rate-setting separate from the government's fiscal pressures.

Related concepts

• Monetary policy
• Expansionary monetary policy
• Contractionary monetary policy
• Quantitative tools of monetary policy
• Cash Reserve Ratio
• Net Demand and Time Liabilities
• Statutory Liquidity Ratio
• Bank rate
• Open market operations
• Outright open market operations

Read more

• Monetary policy and its quantitative instruments