Repo Rate

Repo Rate: Recently, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) decided to cut the repo rate by 25 basis points to 6%.

• The policy stance was changed from “neutral” to “accommodative”, signaling possible future rate cuts.
• About: The repo rate is the interest rate that the RBI charges commercial banks when they borrow money from it.

o The reverse repo rate is the interest rate the RBI pays to commercial banks when they park excess cash with it.

• Why Repo Rate Matters: Repo and reverse repo rates act as the “benchmark” interest rates in the economy. The RBI uses them to set the tone for all other interest rates in the banking system.
• When RBI reduces the repo rate: Banks lower their lending and deposit rates → People are encouraged to spend (savings earn less interest) → Businesses are encouraged to invest (loans become cheaper).
• When RBI increases the repo rate: Banks pay more to borrow and hence charge higher interest to customers → Borrowing and spending reduce, which helps control inflation.