What is Repo Rate?
Having a repo rate is essential because it allows the central bank to manage inflation, control liquidity, and stabilise the economy. By adjusting this rate, the central bank can influence lending rates across the economy, either encouraging spending during slow growth periods or tightening credit to curb inflation. It serves as a benchmark interest rate employed by the Reserve Bank of India (RBI) to ensure the effective functioning of the monetary system. This rate not only impacts businesses and consumers but also helps maintain a balance between economic growth and price stability. In this blog, we will understand what is the current repo rate in India, repo rate vs reverse repo rate and the RBI repo rate history.
Latest Updates on Repo Rates
The full form of repo rate is repurchase rate. Here are the latest updates on the current Repurchase Rates from 2023.
| Date | Updates |
| 10th August 2023 | The Reserve Bank of India (RBI) maintains the repurchase rate at 6.5%. |
| 8th June 2023 | The Reserve Bank of India (RBI) decides to keep the repurchase rate steady at 6.5%. |
| 6th April 2023 | The Reserve Bank of India (RBI) holds the repurchase rate steady at 6.5%. |
| 8th February 2023 | The Reserve Bank of India (RBI) increases the rate by 25 basis points to 6.5%. |
| 7th December 2022 | The Reserve Bank of India (RBI) increases the rate by a modest 35 basis points in response to easing inflationary pressures. |
Let us now understand the RBI repurchase rate meaning.
What is Repo Rate?
The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks, where “repo” represents the Repurchase Agreement. Commercial banks obtain loans from the RBI by selling eligible securities.
They enter into an agreement with the central bank to repurchase these securities at a predetermined price. Especially when they require funds or need to ensure liquidity in volatile market conditions. The RBI employs the repurchase rate as a tool to regulate inflation rates.
What is the Current Repo Rate in India
On February 8, 2023, the Monetary Policy Committee (MPC) announced a 0.25% increase in the repo rate, setting the new rate at 6.50%. This change in the rate followed the rate increase on December 7, 2022, when it was set at 6.25%.
In the same meeting, the MPC decided to keep the reverse repo rate unchanged at 3.35%. Additionally, changes were made to the Bank Rate and the Marginal Standing Facility Rate (MSF) (MSF) rate, which now stands at 6.75%. This change in repo rate highlights the dynamic nature of monetary policy decisions, with the marginal standing facility rate also playing a role in maintaining financial stability.
How Does RBI Repo Rate Work?
As previously mentioned, the Central Bank of India utilises the repurchase rate to regulate the money flow within the market. The meaning of repo rate lies in its role as a tool for controlling liquidity. In times of inflation, the RBI raises the repurchase rate. This increase in repo rate leads to higher interest costs for banks borrowing from the central bank, reducing the money supply within the market and thus controlling inflation.
Consequently, banks are discouraged from borrowing money, leading to a reduction in the money supply within the market, thereby mitigating inflation. Conversely, in times of recession, the RBI repo rates are lowered. The effect of repo rate changes is felt throughout the economy, impacting loan rates, credit availability, and overall market liquidity.
It’s also important to understand the relationship between repo rate vs reverse repo rate. While the repo rate is the rate at which banks borrow from the RBI, the reverse repo rate is the rate at which the RBI borrows from commercial banks. Both work in tandem to control inflation and liquidity in the market. The effect reverse repo rate today is critical in ensuring a balanced financial system.
Historical Trends of Repo Rates in India
The following table illustrates how the RBI has adjusted the rate over time to manage inflation and economic growth. Historically, these changes in repo rate have mirrored the economic conditions of the country, with the RBI raising or lowering the rate depending on inflationary pressures or recessionary concerns. By analysing historical repo rate trends, we can better understand the central bank’s strategy in managing the economy.
| Effective From | Repo Rate |
| 10th August 2023 | 6.50% |
| 8th June 2023 | 6.50% |
| 6th April 2023 | 6.50% |
| 7th December 2022 | 6.25% |
| 30 September 2022 | 5.90% |
| 8 June 2022 | 4.90% |
| 4 May 2022 | 4.40% |
| 22 May 2020 | 4.00% |
| 27 March 2020 | 4.40% |
| 04 October 2019 | 5.15% |
| 07 August 2019 | 5.40% |
| 06 June 2019 | 5.75% |
| 01 August 2018 | 6.50% |
| 06 June 2018 | 6.25% |
| 02 August 2017 | 6.00% |
| 04 October, 2016 | 6.25% |
| 05 April, 2016 | 6.50% |
| 29 September, 2015 | 6.75% |
| 02 June, 2015 | 7.25% |
| 04 March, 2015 | 7.50% |
| 15 January, 2015 | 7.75% |
| 28 January, 2014 | 8.00% |
| 29 October, 2013 | 7.75% |
| 20 September, 2013 | 7.50% |
How is Repo Rate Calculated?
The RBI provides short-term cash loans to banks, typically secured by government securities, to address asset shortages. This practice involves short-term borrowing and lending, wherein the RBI purchases bonds from commercial banks with the agreement to repurchase them at a later date. In broader terms, if the RBI sets the repurchase rate at 5%, and a commercial bank borrows Rs. 100 crore, the interest paid to the central bank will amount to Rs. 5 crore on an annualised basis. This calculation is done using a formula that is part of the RBI monetary policy, the Repurchase Rate India.
The formula used for the calculation of the RBI Repurchase Rate in the example above is as follows:
Repo Rate = ((Repurchase Price – Original Selling Price) / Original Selling Price) * (360 / n)
Where the Original Selling Price represents the Sales Cost of Security, and n stands for the Number of Days to Maturity.
By understanding how the repo rate is calculated, we gain insights into the RBI’s mechanism for controlling liquidity. This calculation also affects the marginal standing facility rate, another key monetary policy tool used by the RBI to provide short-term liquidity to banks.
How Does Repo Rate Bring Changes in the Economy?
The repurchase rate is a key tool in India’s monetary policy, influencing the country’s money supply, inflation, and liquidity. The India repo rate directly affects banks’ borrowing costs; a higher repurchase rate means higher borrowing costs for banks, and vice versa. Repo rate changes can significantly impact the overall economic conditions by influencing how much money is in circulation.
- Addressing High Inflation: In times of high inflation, the RBI seeks to reduce the money flow in the economy. One method is to hike the interest rate, increasing borrowing costs for businesses and industries. This discourages investment and limits the money supply, ultimately curbing inflation and stabilising economic growth. The repo rate hike helps to prevent the economy from overheating by making borrowing more expensive and reducing demand.
- Increasing Market Liquidity: Conversely, when the RBI aims to inject funds into the system, it lowers the repurchase rate. This makes borrowing cheaper for businesses and industries, stimulating investment and expanding the money supply. Lower India repo rate means businesses can access loans at a more affordable cost, driving investments and market activity. This, in turn, fosters economic growth.
How does Repo Rate Impact other Factors?
Here are some other aspects of the Economy that are affected by changes in the Repurchase Rate in India.
Home Loans
Homebuyers with loans linked to repurchase rates or transitioning to them should understand key details. These loans quickly react to rate changes, meaning repurchase rate adjustments can swiftly affect your EMI. If the central bank alters its benchmark rate, your EMI may rise. A higher India repo rate means a higher cost of borrowing for banks, which they pass on to consumers as higher interest rates.
Fixed Deposits
Investors seeking low-risk fixed deposits with competitive rates may benefit from repo rate increases. FDs typically offer better returns after a repo rate hike. Changes in the RBI’s policy repurchase rate impact both lending and deposit rates. However, individual banks and NBFCs determine actual rate adjustments.
Stock Market
Interest rates and the stock market have an inverse relationship. When the central bank raises the repurchase rate, it affects stock markets. Higher rates lead businesses to reduce expansion spending, slowing growth, profits, and future cash flows, causing stock prices to drop.
What is the Importance of Repurchase Rate?
These are the advantages of implicating the RBI Repurchase Rate.
- Enhanced Safety: Collateral provides security in this type of agreement, making it a safer investment option.
- Liquidity Management: Collateralised loans help maintain liquidity in the market.
- Inflation Control: They assist in controlling inflation within the economy.
- Lower Interest Rates: Collateralised loans typically offer lower interest rates compared to unsecured loans.
A decrease in the India repo rate translates to loans being available at more affordable interest rates. Lower interest rates can reduce commodity prices, ultimately benefiting consumers. Thus, understanding what repo rate means and its impact on lending and borrowing is crucial for both individuals and businesses.
Now, let’s learn what Reverse Repo Rate means.
What is Reverse Repo Rate?
The meaning of reverse repo rate is the rate at which the RBI borrows funds from the nation’s commercial banks. This rate pertains to when Indian commercial banks deposit surplus funds with the Reserve Bank of India, typically for short durations.
The Difference Between Repo Rate and Reverse Repo Rate
The repo rate and reverse repo rate meaning can often be confusing, but in simple terms, the repurchase rate is used to inject liquidity into the banking system, while the reverse repo rate is used to absorb excess liquidity.
| Points of Difference | Repo Rate | Reverse Repo Rate |
| Borrowing/Lending | Banks obtain loans at the Repurchase Rate from the RBI. | Banks provide loans to the RBI at the Reverse Repo Rate. |
| Collateral | Banks offer securities as collateral to obtain RBI Repurchase Rate loans. | The RBI offers securities as collateral to obtain Reverse Repo Rate loans or bank deposits. |
| Inflation | Both are components of the LAF and assist in controlling inflation by reducing the money flow and slowing down the economy. | The Reverse Repo Rate encourages banks to deposit funds with the RBI, while the Repo Rate dissuades them from borrowing loans from the RBI to avoid high-interest costs. |
| Dependency | The Reverse Repurchase Rate depends on the Repo Rate. | The Reverse Repo Rate is consistently lower than the Repo Rate due to the spread between them, which constitutes the RBI’s income. |
| Current Rate | 6.50% | 3.35% |
| Economic activities | Low rates stimulate economic activities by expanding the money supply. | Low rates stimulate economic activities by increasing the money supply. |
What is the Impact of Repo Rate?
RBI adjusts the repurchase rate and reverse repo rate in response to changing macroeconomic factors, impacting various sectors of the economy differently. A recent example is the 35 basis point hike in the repurchase rate from 5.90% to 6.25%, while the reverse repurchase rate remained at 3.35%.
Changes in the repurchase rate can directly affect significant loans like home loans. Lowering repurchase rates aims to stimulate growth and economic development by encouraging consumers to borrow more from banks, thereby stabilising inflation.
A decrease in the repurchase rate can lead to banks reducing their lending rates, benefiting retail loan borrowers. To lower loan EMIs, lenders must decrease their base lending rates, in line with RBI guidelines that require banks and financial institutions to pass on interest rate cuts to consumers promptly.
To Wrap It Up…
In conclusion, the Reserve Bank of India uses the Repurchase Rate as a crucial tool to control inflation and ensure economic stability. In response to inflationary pressures, the RBI takes opposing actions, using the rate to either tighten or stimulate the economy. Understanding what is repo rate and reverse repo rate is essential for both businesses and individuals, as changes to these rates directly impact borrowing costs and the overall financial environment.
As we look ahead, keeping an eye on the current repo rate and reverse repo rate will be crucial for understanding the RBI’s strategy in managing India’s economic growth and inflation.
FAQs
RBI Keeps Repurchase Rate Unchanged at 6.5%. The Reserve Bank of India (RBI) lends money to commercial banks or financial institutions in India against government securities at a particular rate, which currently stands at 6.50% in 2023.
On February 8, 2023, there was a 0.25% increase in the repurchase rate, setting the new rate at 6.50%. This adjustment followed the repurchase rate increase on December 7, 2022, when it was set at 6.25%.
Repo Rate = ((Repurchase Price – Original Selling Price) / Original Selling Price) * (360 / n)
Where Original Selling Price represents the Sales Cost of Security, and n stands for the Number of Days to Maturity.
The decision to set or change the repurchase rate is made by the RBI’s Monetary Policy Committee (MPC), which meets periodically to review various economic factors such as inflation, growth, and liquidity in the financial system.
Yes, repurchase rate changes affect bonds and equities. When the repo rate increases, bond prices fall due to rising interest rates, and equities may decline as borrowing becomes costlier, reducing profits. A lower repurchase rate boosts both bonds and stocks by encouraging borrowing and investment.
CRR (Cash Reserve Ratio): The portion of a bank’s deposits it must keep as cash with the RBI, used to control liquidity.
SLR (Statutory Liquidity Ratio): The percentage of deposits banks must hold in liquid assets like government securities, helping manage credit and ensure stability.
