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Current Repo Rate

As announced by the central bank of the country, i.e. the Reserve Bank of India (RBI) on 08 August 2022, the current Repo Rate (RR) is 5.40%. Interest rates on loans are expected to remain steady as the Monetary Policy Committee (MPC) kept the RR unchanged.

Updated:

What is Repo Rate?

Repo Rate (RR) is the rate at which the central bank of the country, i.e. the Reserve Bank of India (RBI), lends money to commercial banks or financial institutions in lieu of securities to maintain liquidity during shortage of funds or because of some statutory measures. It is one of the key tools of RBI to keep inflation under control. Any changes in Repo Rate impact the flow of money in the market. The current Repo Rate is 5.40% p.a.

Current RBI Repo Rate 2022

Repo Rate5.40%
Bank Rate5.65%
Reverse Repo Rate3.35%
Marginal Standing Facility Rate5.15%

Additional Info: You can also check Best Home Loan Interest Rates

Repo Rate Meaning

Repo Rate meaning or full form is ‘Repurchasing Option’ Rate. It is also called the ‘Repurchasing Agreement’. People borrow loans from banks in times of financial requirement and pay interest on the borrowed amount. Similarly, commercial banks and other financial institutions also go through shortage of funds sometimes. At that time, they can also borrow funds from the country’s apex bank, which is RBI in India. The Central Bank of any country lends money to commercial banks and other financial institutions at an interest rate, known as RBI Repo Rate, on the principal amount.

Repo Rate is one of the main Monetary Policies of RBI. The Governor of RBI presides over the bi-monthly meetings of MPC or the Monetary Policy Committee, which usually consists of 6 members. They formulate, administer and modify the policy rates together. The RBI changes the rates as per the liquidity crunch or surplus in the nation.

RBI Repo Rate Cut Trends for Period 2022 -2005

Effective DateRepo Rate%Change
5 August 20225.40%0.5%
8 June 20224.90%0.5%
May 20224.40%0.4%
09 Oct 20204.00%0.00%
06 Aug 20204.00%0.00%
22 May 20204.00%0.40%
27 March 20204.40%0.75%
6 February 20205.15%0.25%
07 August, 20195.40%0.35%
06 June, 20195.75%0.25%
04 April, 20196.00%0.25%
07 February, 20196.25%0.25%
01 August, 20186.50%0.25%
06 June, 20186.25%0.25%
02 August, 20176.00%0.25%
04 October, 20166.25%0.25%
05 April, 20166.50%0.25%
29 September, 20156.75%0.50%
02 June, 20157.25%0.25%
04 March, 20157.50%0.25%
15 January, 20157.75%0.25%
28 January, 20148.00%-0.25%
29 October, 20137.75%-0.25%
20 September, 20137.50%-0.25%
03 May, 20137.25%-0.50%
17 March, 20116.75%-0.25%
25 January, 20116.50%-0.25%
02 November, 20106.25%-0.25%
16 September, 20106.00%-0.25%
27 July, 20105.75%-0.25%
02 July, 20105.50%-0.25%
20 April, 20105.25%-0.25%
19 March, 20105.00%-0.25%
21 April, 20094.75%0.25%
05 March, 20095.00%0.50%
05 January, 20095.50%1.00%
08 December, 20086.50%1.00%
03 November, 20087.50%0.50%
20 October, 20088.00%1.00%
30 July, 20089.00%-0.50%
25 June, 20088.50%-0.50%
12 June, 20088.00%-0.25%
30 March, 20077.75%-0.25%
31 January, 20077.50%-0.25%
30 October, 20067.25%-0.25%
25 July, 20067.00%-0.50%
24 January, 20066.50%-0.25%
26 October, 20056.25%00.00

Importance of RBI Repo Rate

There are some components of Repo Rate transaction between banks and the RBI as below:

  • RBI lends money to the commercial banks in a legal agreement that requires collateral in the form of securities and bonds. RBI leverages against these securities offered by banks to lend monetary help.
  • Repo Rate loans or transactions equals short-term borrowings. Banks receive overnight or term funds from RBI while the RBI has the securities.
  • Securities can be repurchased by banks on a specified date and at a predetermined price. This predetermined price is the loan amount and the interest on it is calculated at the Repo Rate.
  • RBI is authorized to sell the securities if banks become defaulters or fail to repay the cash on the predetermined date.
  • Banks borrow money to deal with a cash reserves deficiency or to maintain the minimum reserve balance as a statutory measure.
  • The RBI periodically decides whether to hike or slash the RR or leave it unchanged. The RBI's monetary policy committee's decision can impact liquidity and inflation in the country’s economy.
  • The RR is a very important tool of the RBI to control inflation trends in the country. Increasing or reducing the rates makes borrowing more expensive or cheaper for commercial banks.
  • The RR and inflation have an inverse relationship. If the RR is increased, it brings down the inflation and if it is lowered, inflation will go up.

Impacts of Repo rate

As mentioned above, even a few basis points (BSP) change in Repo Rate can have a huge impact. Repo Rate influences credit availability, inflation, liquidity, and the economic activities in the nation. When the financial system goes through even the slightest of change, the economy can flourish or suffer. Likewise, the country’s economy must be pushed down sometimes to stabilize inflation.

Below are the impacts of hike or reduction in Repo Rate:

Impact on inflation and economy: When the Repo Rate is high, banks are hesitant to borrow from RBI to avoid paying high interest rates. At that time, banks take precautions not to overspend their cash reserve by minimising their loan grants. This halts the money flow and the economic activities. However, it also prevents inflation. When RBI slashes the rate, it enables the banks to borrow, spend and invest more. Increased cash flow will result in faster business cycles and a boom in the economy.

Impact on bank loan rates: When the RR is high, banks are bound to clear off their loans to the RBI with a higher interest amount. As a result, the banks may charge a higher rate of interest on loans to borrowers to compensate for the same. Fundamentally, RBI discourages borrowing by banks and banks discourage the customers. This process drains out surplus liquidity from the market, resulting in controlling the inflation rate. As the RR declines, banks may also reduce their interest rates to attract more customers. Also, loan applications for customers of commercial banks may become easier. It increases the demand for home loans and other loans. While the customers find financial aid at a lower interest rate, the banks profit through it. This leads to the economical bloom due to a rushed money flow because the cost of funds goes down. 

Impact on bank deposit rates: Apart from the interest rates on loans, banks also adjust the interest rate on fixed deposits or savings accounts as per the Repo Rate. RR is a crucial benchmark according to which the banks set up all kinds of rates.

How Repo Rate Functions?

Banks borrow loans from RBI by pledging their securities and then repurchase them the following day. For banks undergoing a cash crunch, the loan is an overnight fund. Although the loan at Repo Rate is usually for 1 day, banks may require it for more than a day. The one-day loan is called Overnight Repo while above that is a Term Repo. Term Repo is also known as a Variable Rate Term Repo. RBI generally announces auction for Term Repo as it can be fixed for 7, 14, or 28 days. When the inflation is higher than the RBI’s standards, it hikes the current Repo Rate of RBI to check it. RBI raises the RR to infuse liquidity in the economy with a lower cost of funds for borrowers.

Difference Between Bank Rate and Repo Rate

Bank Rate and Repo Rate, both are powerful tools for RBI to keep a check on money flow and economic activities in the market. However, the main difference between the two is marked by the pledge of government securities to RBI for a loan.

Here are the main differences between the two:

  • Commercial banks and other financial institutions borrow money at Bank Rate without any security, whereas securities serve as collateral for loans in Repo Rate.
  • Usually, the Bank Rate is higher than the Repo Rate as in the case of the Bank Rate, the RBI provides loans to the banks without security.
  • Usually, the loans at Bank Rate are lent for longer-term, whereas when lent at Repo Rate it is meant for the short term. 
  • Changes in either of these rates may impact the commercial banks’ customers. However, the Bank Rate influences the rates on loans directly. Changing the loan interest rates by banks may take time subject to Repo Rate change. That is because it’s for a shorter duration. RR usually affects the big-ticket loans, such as home loans.

When Does RBI Change Repo Rate?

During a high inflation, RBI makes strong efforts to bring down the money flow in the economy and one way to do this is by hiking the repo rate. This increase in RR makes borrowing a costly affair for businesses and industries, and slows down investment and money supply in the market.

What is the Reverse Repo Rate?

Reverse Repo Rate (RRR) is a mechanism of absorbing the liquidity in the market and restricting the borrowing power of investors. RRR the rate at which the RBI borrows funds from commercial banks when required. This happens when there is excess liquidity in the market. The banks then benefit out of it by getting interest for their holdings with RBI. The reverse repo rate today is 3.35%.

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Repo Rate FAQs

✅ How does the repo rate affect the economy?

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A change in RR affects the liquidity or cash flow in the economy. An increase in RR reduces the flow of money and a reduction in RR increases the flow of money in the economy.

✅ How does the repo rate work?

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During cash crunch situations, banks and other financial institutions borrow funds from RBI against the eligible securities provided by them to the apex bank. The interest rate on which the RBI lends this money to them is called Repo Rate (RR). RR is an agreement between banks and RBI in which the RBI lends loans to the financial entities against security.

✅ How does inflation and repo rate relate?

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During inflation, RBI makes efforts to bring down the money flow in the economy and one way to do so is by increasing the Repo Rate (RR). Higher RR means higher cost of borrowing for banks and vice-versa.

✅ When is the Repo Rate decided?

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Repo Rate is decided bi-monthly by the RBI's Monetary Policy Committee. The Repo Rate today is 5.40%.

✅ How does the repo rate affect the life of common people?

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When RR is increased, banks are bound to pay higher interest rates to the RBI which in turn prompts them to increase the interest rates on the loan products offered to customers. The customers are then dissuaded from taking credit from banks, leading to a shortage of funds in the economy and less liquidity. Higher repo rate means common people will have to pay higher interest rates on loans.

✅ What is the difference between MCLR and repo rate?

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MCLR is Marginal Cost of Funds Based Lending Rate. It is the minimal interest rate that lenders can charge in case a loan is taken by a borrower. Repo Rate is the rate at which banks borrow money from RBI. The MCLR depends on changes in the RR made by the RBI.

✅ What are the components of repo transactions?

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Following are the components of repo transactions between the RBI and the bank:

  • Banks provide eligible securities as recognized by RBI that are above the Statutory Liquidity Ratio limit.
  • RBI then gives 1 day or overnight loan to the bank.
  • The interest is charged by the RBI from the bank.
  • Banks then repay the borrowed loan after one day. 
  • Banks then repurchase the security they provided as collateral.

✅ How does the repo rate affect loans?

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Higher Repo Rate means higher interest rates on loans and vice versa.

✅ Does the repo rate affect existing home loans?

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Yes, an increase or decrease in repo rate increases or decreases the home loan interest rates respectively.

✅ Does the repo rate affect existing personal loans?

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Yes, a change in repo rate affects the existing personal loan interest rates.

✅ Why is the bank rate higher than the repo rate?

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Banks borrow money from RBI and lend it to their customers at a higher rate of interest, thus, making profits. That is the reason Bank Rate is usually higher than the Repo Rate as it is an important tool to control liquidity.

✅ What is the current repo rate and reverse repo rate?

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The current repo rate and reverse repo rate is 5.40% and 3.35% respectively.