Have you ever wondered how decisions made by central banks impact the interest rates you pay on your loans or earn on your savings? The answer often lies in the repo rate—a key indicator of economic health. This post will explore how changes in the repo rate trickle down from high-level policy decisions to the financial choices we make every day.
Repo Rate Meaning
The Repo Rate (Repurchase Rate) is the interest rate at which a central bank (e.g., the Reserve Bank of India, or RBI) lends short-term funds to commercial banks, typically against government securities as collateral. It helps regulate liquidity, control inflation, and stabilize the economy.
- Mechanism: Banks sell securities to the central bank with an agreement to repurchase them later at a higher price, reflecting the interest.
- Purpose: It influences borrowing costs, money supply, and economic activity.
Read More: The Impact of RBI Repo Rate Cut on Home Buyers
Latest Repo Rate As of 2025
The current repo rate in India is 6.25% in 2025.
Key Highlights from the RBI’s Monetary Policy Update
- Meeting Period: February 5–7, 2025
- Governor: Sanjay Malhotra (first MPC meeting under his leadership)
- Rate Cut:
- Repo rate reduced by 25 bps from 6.5% to 6.25%
- This marks the first rate cut in nearly five years.
- Policy Stance: The MPC maintained a neutral stance, indicating a balanced approach that will adapt based on future economic data.
The Broader Economic Context
- Inflation Trends:
- Retail inflation eased to approximately 5.22% in December 2024.
- Forecasts suggest a continued moderation in inflation.
- GDP Growth Forecast:
- The RBI projects real GDP growth for FY26 to be around 6.7%.
- This projection is part of a broader strategy to support economic growth amid a slowing economy.
Data Source: RBI Official Website
The Repo Rate Timeline
The RBI has adjusted the repo rate dynamically over the years to address economic challenges:
- All-Time High: 16% (August 2000, during a liquidity crisis).
- Recent Trends:
- 2020–2023: Reduced to 4% to counter COVID-19 economic slowdown28.
- 2023–2025: Gradually increased to 6.25% (as of February 2025) to manage inflation.
- Global Context: The U.S. repo rate stands at 5.37%, while China’s reverse repo rate is 1.5%.
Historical Data: 2005 – 2024
| Effective Date | Repo Rate | % Change |
|---|---|---|
| 6 December 2024 | 6.50% | – |
| 18 September 2024 | 6.50% | – |
| 8 June 2023 | 6.50% | – |
| 8 February 2023 | 6.50% | 0.25% |
| 7 December 2022 | 6.25% | 0.35% |
| 30 September 2022 | 5.90% | 0.50% |
| 5 August 2022 | 5.40% | 0.50% |
| 8 June 2022 | 4.90% | 0.50% |
| May 2022 | 4.40% | 0.40% |
| 9 October 2020 | 4.00% | 0.00% |
| 6 August 2020 | 4.00% | 0.00% |
| 22 May 2020 | 4.00% | 0.40% |
| 27 March 2020 | 4.40% | 0.75% |
| 6 February 2020 | 5.15% | 0.25% |
| 7 August 2019 | 5.40% | 0.35% |
| 6 June 2019 | 5.75% | 0.25% |
| 4 April 2019 | 6.00% | 0.25% |
| 7 February 2019 | 6.25% | 0.25% |
| 1 August 2018 | 6.50% | 0.25% |
| 6 June 2018 | 6.25% | 0.25% |
| 2 August 2017 | 6.00% | 0.25% |
| 4 October 2016 | 6.25% | 0.25% |
| 5 April 2016 | 6.50% | 0.25% |
| 29 September 2015 | 6.75% | 0.50% |
| 2 June 2015 | 7.25% | 0.25% |
| 4 March 2015 | 7.50% | 0.25% |
| 15 January 2015 | 7.75% | 0.25% |
| 28 January 2014 | 8.00% | -0.25% |
| 29 October 2013 | 7.75% | -0.25% |
| 20 September 2013 | 7.50% | -0.25% |
| 3 May 2013 | 7.25% | -0.50% |
| 17 March 2011 | 6.75% | -0.25% |
| 25 January 2011 | 6.50% | -0.25% |
| 2 November 2010 | 6.25% | -0.25% |
| 16 September 2010 | 6.00% | -0.25% |
| 27 July 2010 | 5.75% | -0.25% |
| 2 July 2010 | 5.50% | -0.25% |
| 20 April 2010 | 5.25% | -0.25% |
| 19 March 2010 | 5.00% | -0.25% |
| 21 April 2009 | 4.75% | 0.25% |
| 5 March 2009 | 5.00% | 0.50% |
| 5 January 2009 | 5.50% | 1.00% |
| 8 December 2008 | 6.50% | 1.00% |
| 3 November 2008 | 7.50% | 0.50% |
| 20 October 2008 | 8.00% | 1.00% |
| 30 July 2008 | 9.00% | -0.50% |
| 25 June 2008 | 8.50% | -0.50% |
| 12 June 2008 | 8.00% | -0.25% |
| 30 March 2007 | 7.75% | -0.25% |
| 31 January 2007 | 7.50% | -0.25% |
| 30 October 2006 | 7.25% | -0.25% |
| 25 July 2006 | 7.00% | -0.50% |
| 24 January 2006 | 6.50% | -0.25% |
| 26 October 2005 | 6.25% | 0.00% |
Read More: RBI Loan Moratorium
How Does the Repo Rate Work?
Central banks use the repo rate to steer economic conditions:
- Increase: Raises borrowing costs for banks, reducing liquidity and curbing inflation.
- Decrease: Lowers borrowing costs, encouraging lending and stimulating growth.
Example: If the RBI hikes the repo rate from 6% to 6.5%, a bank borrowing ₹1 crore would pay ₹6.5 lakh annually instead of ₹6 lakh, passing this cost to consumers.
How the RBI Sets the Repo Rate
The Reserve Bank of India (RBI) determines the repo rate through its Monetary Policy Committee (MPC), which assesses various macroeconomic factors to set this crucial interest rate.
The repo rate is the rate at which the RBI lends money to commercial banks against government securities.
What Influences the Repo Rate?
- Inflation: High inflation may prompt a repo rate hike to curb spending, while low inflation could lead to a rate cut to boost borrowing and demand.
- Economic Growth: Sluggish GDP growth may result in a rate cut to stimulate borrowing, investment, and consumption.
- Liquidity: Excess liquidity could lead to a rate hike to prevent inflation, while a liquidity crunch may trigger a rate cut to ease funding.
- Global Factors: Changes in oil prices, global demand, and major economies’ policies are considered due to their impact on domestic inflation and growth.
How Repo Rate Changes Affect the Economy
Here’s how increases or decreases in the repo rate can influence various aspects of economic activity.
| Repo Rate Increase | Repo Rate Decrease |
|---|---|
| Higher loan interest rates | Cheaper loans for businesses/individuals |
| Reduced money supply, slower inflation | Increased spending and economic growth |
| Stronger currency due to foreign investment | Weaker currency, boosting exports |
| Lower bond prices (higher yields) | Higher bond prices (lower yields) |
Impact of Repo Rate on Home Loans
Here’s how fluctuations in the repo rate translate into changes in mortgage interest rates and EMIs.
Interest Rates
- Repo Rate Reduction: When the RBI lowers the repo rate, commercial banks can borrow funds at a reduced cost. This often prompts banks to decrease their lending rates, making home loans more affordable for borrowers.
- Repo Rate Increase: Conversely, an increase in the repo rate can lead to higher home loan interest rates, raising the overall cost of borrowing.
Read More: Will Home Loan Interest Rates Go Down?
Equated Monthly Installments (EMIs)
- Floating-Rate Loans: A reduction in the repo rate can lower EMIs for both existing and new borrowers with floating-rate home loans, easing their financial burden.
- Example: A 25 basis points (0.25%) cut in the repo rate can lead to significant savings over the loan tenure. For instance, on a ₹50 lakh loan over 20 years, this could result in savings of approximately ₹4.20 lakh in interest payments.
Read More: Repo Rates vs. Home Loan Interest Rates
What is Repo Linked Lending Rate (RLLR)?
The Repo Linked Lending Rate (RLLR) is an interest rate benchmark used by Indian banks, directly tied to the Reserve Bank of India’s (RBI) repo rate—the rate at which the RBI lends money to commercial banks.
This linkage ensures that any change in the RBI’s repo rate leads to a corresponding adjustment in the bank’s lending rates, promoting transparency and quicker transmission of monetary policy decisions to borrowers.
Mechanism
Under the RLLR framework, a bank’s lending rate is composed of two components:
- Repo Rate: The prevailing rate at which the RBI lends to commercial banks.
- Spread or Margin: An additional percentage added by the bank to cover its costs and profit margin.
For instance, if the RBI’s repo rate is 6.25% and a bank applies a spread of 2.5%, the RLLR would be 8.75%. This means that the bank’s lending rates for loans linked to the RLLR would be set at 8.75%, subject to periodic revisions based on changes in the repo rate.
Considerations for Borrowers
While the RLLR framework offers greater transparency and quicker rate adjustments, borrowers should be aware that:
- Interest Rate Volatility: Since RLLR is directly linked to the repo rate, any increase in the repo rate will lead to a corresponding rise in loan interest rates, potentially increasing the Equated Monthly Installments (EMIs) for borrowers.
- Reset Frequency: Banks are required to reset the interest rates on RLLR-linked loans at least once every three months. This means that borrowers’ EMIs could change quarterly, depending on movements in the repo rate.
Read More: RLLR vs. MCLR vs. PLR
How Does Repo Rate Control Inflation?
Adjusting the repo rate influences the money supply in the economy, thereby impacting inflation levels.
Mechanism of Inflation Control through Repo Rate Adjustments:
| Action | Objective | Process | Outcome |
|---|---|---|---|
| Increasing Repo Rate | To curb high inflation | Central bank raises repo rate, making borrowing more expensive for banks. | Higher loan interest rates → Reduced borrowing and spending → Lower money supply → Decreased demand → Lower inflation. |
| Decreasing Repo Rate | To stimulate economic activity | Central bank lowers repo rate, reducing borrowing costs for banks. | Lower loan interest rates → Increased borrowing and spending → Higher money supply → Increased demand → Higher price levels. |
Repo Rate vs. Reverse Repo Rate
Discover the similarities and differences between these rates and their impact on the economy.
| Aspect | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Definition | The interest rate at which the central bank lends short-term funds to commercial banks against government securities. | The interest rate at which the central bank borrows funds from commercial banks by lending securities. |
| Purpose | Injects liquidity into the banking system to address short-term funding shortages. | Absorbs excess liquidity from the banking system to control money supply. |
| Impact on Economy | Increase: Makes borrowing expensive, leading to higher interest rates, helping control inflation. Decrease: Encourages borrowing and spending, stimulating the economy. | Increase: Encourages banks to park excess funds with the central bank, reducing money supply. Decrease: Makes it less attractive for banks to deposit funds, increasing money supply. |
| Interest Rate Level | Typically higher than the Reverse Repo Rate. | Typically lower than the Repo Rate. |
| Function in Monetary Policy | Used to manage inflation and stimulate economic growth by influencing lending rates. | Used to manage liquidity in the banking system and control short-term money supply. |
Read More: What is Reverse Repo Rate?
Difference Between Repo Rate and MCLR
Explore the differences between the repo rate and the Marginal Cost of Funds based Lending Rate and their effects on loan pricing.
| Aspect | Repo Rate | MCLR |
|---|---|---|
| Determined By | Set by the Reserve Bank of India (RBI). | Set internally by individual banks based on RBI guidelines. |
| Nature | External benchmark influencing the overall interest rate environment. | Internal benchmark specific to each bank, determining the minimum lending rate. |
| Frequency of Revision | Reviewed periodically by the RBI (typically during monetary policy meetings). | Reviewed periodically by banks (often on a monthly basis). |
| Direct Impact On | Influences banks’ cost of funds, thereby affecting the broader economic interest rates. | Directly affects the lending rates for various loan products. |
| Transmission Mechanism | Changes can lead to adjustments in banks’ cost of funds, which may then influence lending rates (transmission may not be immediate or uniform). | Changes are directly reflected in the lending rates of loans linked to MCLR, ensuring a more transparent and immediate impact. |
Conclusion
The repo rate is a linchpin of monetary policy, balancing growth and inflation. For individuals and businesses, understanding its dynamics aids in financial planning, from home loans to investments.
With repo rates on the decline, there’s never been a better time to explore your home loan options. Credit Dharma can help you secure competitive offers and expert guidance tailored to your needs.
Frequently Asked Question
As of February 7, 2025, the Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points to 6.25%.
The repo rate is the interest rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which the RBI borrows money from commercial banks.
The Statutory Liquidity Ratio (SLR) is the percentage of a bank’s net demand and time liabilities that must be maintained in liquid assets, while the Cash Reserve Ratio (CRR) is the percentage of deposits that banks must hold as reserves with the RBI.
The latest repo rate, as of February 7, 2025, is 6.25%, following a 25 basis point reduction by the RBI.
The repo rate is determined by the Reserve Bank of India’s Monetary Policy Committee (MPC).
CRR stands for Cash Reserve Ratio, and SLR stands for Statutory Liquidity Ratio.
The Marginal Standing Facility (MSF) rate is the rate at which banks can borrow funds overnight from the RBI against government securities.
The repo rate is set by the RBI’s Monetary Policy Committee based on factors like inflation, economic growth, and liquidity conditions; it is not derived from a specific formula.
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