Repo Rate

The repo rate is the interest rate at which the Reserve Bank of India provides short-term funds to banks against eligible securities through a repurchase agreement. It is the principal policy rate used by the RBI to signal and implement its monetary policy stance.

How a repo transaction works

A bank obtains liquidity by selling eligible securities to the RBI while agreeing to repurchase them later at a predetermined price. The difference between the sale and repurchase prices reflects interest charged at the repo rate, while the securities serve as collateral.

Place in the monetary policy framework

Under the Reserve Bank of India Act, 1934, the six-member Monetary Policy Committee determines the policy rate needed to achieve the inflation target. The repo rate anchors the liquidity adjustment framework: the Standing Deposit Facility forms its lower bound and the Marginal Standing Facility forms its upper bound.

• The committee has three RBI members and three members appointed by the Central Government; the RBI Governor chairs it.
• Decisions are taken by majority, and the Governor has a casting vote in case of a tie.

Economic effects of a change

• A repo-rate cut generally reduces the cost of short-term RBI liquidity and can encourage lower lending rates, credit expansion, investment and demand.
• A repo-rate increase generally tightens financial conditions, moderating credit and aggregate demand to contain inflationary pressure.
• Transmission is neither immediate nor uniform because bank funding costs, liquidity, borrower risk, credit demand and financial-market conditions also affect lending rates.

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