Repo Rate
The repo rate — short for repurchase rate — is the interest rate at which the RBI provides overnight or short-term liquidity to commercial banks. Banks pledge eligible government securities as collateral and agree to repurchase them at a slightly higher price; the difference represents the interest cost.
Role in Monetary Policy
The repo rate is the RBI's primary instrument for monetary policy transmission. Changes are decided by the Monetary Policy Committee (MPC), a six-member body that meets approximately every two months. As of early 2026, the repo rate is approximately 6.50% per annum.
Transmission Mechanism
- •A rate cut reduces banks' borrowing cost, which may translate into lower lending and deposit rates.
- •A rate hike raises banks' cost of funds, which may lead to higher lending and deposit rates.
EBLR-linked loans adjust within the same quarter; MCLR-linked loans may take 6–12 months.
Related Rates
- •Standing Deposit Facility (SDF): Floor of the corridor (repo rate − 0.25%).
- •Marginal Standing Facility (MSF): Ceiling (repo rate + 0.25%).
- •Bank Rate: Aligned with MSF rate.
Impact on Deposits
A rising repo rate environment generally correlates with higher deposit rates as banks compete for deposits. A declining rate environment tends to coincide with falling deposit rates.
Historical Context
Between 2020–2022, the rate was at a historic low of 4% to support the economy through the pandemic. A series of hikes followed in 2022–23 to contain inflation.