What is Repo Rate? Meaning, impact on loans and economy
The repo rate is the rate at which RBI lends to banks. Learn the meaning of repo rate, who decides it, and its impact of loans, EMIs, and the Indian economy.
The repo rate is one of the most important terms in banking and finance, often making headlines every time the Reserve Bank of India (RBI) announces its monetary policy. The repo rate is the RBI’s most powerful tool to manage inflation, growth, and liquidity. Every change in this rate has a ripple effect across the banking system and directly impacts consumers, savers, and investors. But what exactly does it mean, and why should it matter to you as a borrower, saver, or investor?
Meaning Of Repo Rate
The term repo stands for repurchase option. In simple terms, it is the rate at which the RBI lends money to commercial banks when they run short of funds. To borrow this money, banks sell government securities to the RBI with an agreement to repurchase them later at a predetermined price.
The repo rate is therefore the cost of short-term borrowing for banks. When the repo rate goes up, borrowing becomes more expensive for banks; when it goes down, it becomes cheaper.
Who Decides The Repo Rate?
The repo rate is decided by the Monetary Policy Committee of the RBI, which meets every two months. The MPC carefully reviews inflation, growth, global economic conditions, and currency stability before deciding whether to raise, cut, or maintain the repo rate.
Why Is Repo Rate Important?
The repo rate is a powerful tool to control inflation and liquidity in the economy.
- When inflation is high: The RBI raises the repo rate. The higher borrowing costs discourage banks from lending aggressively, which cools consumer demand and slows price rise.
- When growth needs support: The RBI cuts the repo rate, making borrowing cheaper. This encourages spending, business expansion, and investment.
In short, the repo rate is like a lever the RBI uses to balance growth and inflation.
Impact On You And Me
Changes in the repo rate directly influence interest rates on home loans, car loans, and personal loans.
- If the RBI raises the repo rate, banks usually hike lending rates, leading to higher EMIs.
- If the RBI cuts the repo rate, banks may lower lending rates, making loans more affordable.
It also affects deposit rates. Higher repo rates may prompt banks to offer better returns on fixed deposits, while lower rates could reduce deposit yields.
Repo Rate vs Reverse Repo Rate
While the repo rate is what banks pay to borrow from the RBI, the reverse repo rate is what banks earn when they park surplus funds with the RBI. Both work together to regulate liquidity.
Example Of Repo Rate In Action
Suppose the RBI raises the repo rate by 0.25%. For a borrower with a ₹50 lakh home loan, this may mean an increase in the EMI by a few hundred rupees each month. On a macro level, it can help cool inflation but may also slow demand for housing and cars.
