What is Repo Rate?
In managing a nation’s economy and financial markets, a vital tool is monetary policy, and one of its key instruments is the Repo Rate. The repo rate, short for “repurchase rate,” serves as a benchmark interest rate employed by the Reserve Bank of India (RBI) to ensure the effective functioning of the monetary system.
The term “repo rate” is commonly used in discussions related to banking and monetary policies. It signifies the interest rate that commercial banks pay to the RBI for overnight loans backed by securities.
Latest Updates on Repo Rates
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 repo rate by 25 basis points to 6.5%. |
| 7th December 2022 | The Reserve Bank of India (RBI) increases the repo 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 interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks, where “repo” represents 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.
Current Repo Rate in India.
On February 8, 2023, the Monetary Policy Committee (MPC) announced 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%.
In the same meeting, the MPC decided to keep the reverse repurchase rate at 3.35%. Additionally, changes were made to the Bank Rate and the Marginal Standing Facility (MSF) rate, which now stand at 5.15% and 6.75%, respectively.
How does RBI Repo Rate work?
As previously mentioned, the central bank of India utilizes the repurchase rate to regulate the money flow within the market. In times of inflation, the RBI raises the repurchase rate. This higher repurchase rate signifies that banks borrowing from the central bank during this period will incur increased interest costs.
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.
Historical Trends of Repo Rates in India.
The following table demonstrates the historical trends of RBI Repurchase Rates in India:
| 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 annualized basis. This calculation is done using a formula which is part of the RBI monetary policy 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 Original Selling Price represents the Sales Cost of Security, and n stands for the Number of Days to Maturity.
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. It directly affects banks’ borrowing costs; a higher repurchase rate means higher borrowing costs for banks, and vice versa.
Addressing High Inflation
In times of high inflation, the RBI seeks to reduce the money flow in the economy. One method is to raise the repurchase rate, increasing borrowing costs for businesses and industries. This discourages investment and limits the money supply, ultimately curbing inflation and stabilizing economic growth.
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. 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 India.
Home Loans
Homebuyers with house loans linked to repo rates, or those transitioning to them from existing loans, should grasp important loan details. These loans respond quickly to rate changes, meaning repurchase rate adjustments can significantly and swiftly impact your EMI payments. This implies that if the central bank alters its benchmark lending rate, your home loan EMI may increase. Banks will also determine the additional interest they apply to repurchase rate-based mortgages.
Fixed Deposits
Investors seeking low-risk fixed deposits with competitive rates may benefit from repo rate increases. FDs are likely to see improved returns as investments. Changes in the RBI’s policy repurchase rate will affect bank lending and deposit rates. However, individual banks and NBFCs will make decisions regarding actual rate adjustments.
Stock Market
Interest rates and the stock market share an inverse relationship. When the central bank raises the repurchase rate, it immediately impacts the stock markets. Such rate hikes lead businesses to curtail expansion spending, slowing growth, affecting profits and future cash flows, and causing stock prices to decline.
What is the importance of Repo 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: Collateralized loans help maintain liquidity in the market.
- Inflation Control: They assist in controlling inflation within the economy.
- Lower Interest Rates: Collateralized loans typically offer lower interest rates compared to unsecured loans.
A decrease in the repurchase rate translates to loans available at more affordable interest rates. Lower interest rates have the potential to reduce commodity prices, ultimately benefiting consumers.
Now, let’s learn about the Reverse Repurchase Rate meaning.
What is Reverse Repo Rate?
The reverse repo rate serves as the counterpart to the repurchase rate. It represents 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
| 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 repurchase 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 repo rates aims to stimulate growth and economic development by encouraging consumers to borrow more from banks, thereby stabilizing 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.
Furthermore, adjustments to the RBI Repo Rate have a substantial impact on lending practices and loan rates, including home loans, which can vary with changes in the rate.
FAQs
The repo rate definition is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks, where “repo” represents Repurchase Agreement. Commercial banks obtain loans from the RBI by selling eligible securities.
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 Repo Rate, which currently stands at 6.50% in 2023.
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 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.
