What Is Repo Rate?
Repo rate refers to the rate at which banks borrow money from the RBI to manage short‑term liquidity needs.
Banks pledge government securities to RBI and agree to repurchase them later at a higher price. The interest embedded in this transaction is the repo rate.
Because banks price most loans using their cost of funds, repo rate directly influences:
- Home loan interest rates
- Personal and auto loans
- MSME and business credit
- Overall borrowing cost in the economy
Practical takeaway: When repo rate rises, loans become expensive. When it falls, loans become cheaper.
Repo Rate Full Form
Repo = Repurchase Agreement
It means banks sell government securities to RBI with an agreement to repurchase them later at a predetermined price.
In simple terms, repo rate is the price of money in the Indian economy.
How Does the Repo Mechanism Work?
- A bank faces a short‑term cash requirement.
- It borrows from the RBI by pledging government securities.
- RBI lends at the prevailing repo rate.
- The bank repurchases the securities later, paying principal plus interest.
This interest becomes part of the bank’s lending cost and eventually flows into EMIs and loan rates.
What Is Reverse Repo Rate?
Reverse repo rate is the interest rate at which RBI borrows money from commercial banks.
When banks have surplus cash, they park it with RBI and earn interest at the reverse repo rate.
In effect:
- Repo rate injects liquidity into the system
- Reverse repo rate absorbs excess liquidity
Difference Between Repo Rate and Reverse Repo Rate
| Aspect | Repo Rate | Reverse Repo Rate |
| Who lends | RBI to banks | Banks to RBI |
| Objective | Add liquidity | Absorb liquidity |
| Impact on borrowers | Direct | Indirect |
| Typical level | Higher | Lower than repo |
Current RBI Repo Rate (2026)
(Always verify from RBI at publishing time)
- RBI Repo Rate: 5.25%
- Reverse Repo Rate: 3.35%
- Policy decided by RBI’s Monetary Policy Committee (MPC)
Why Does RBI Change the Repo Rate?
RBI uses repo rate to balance:
- Inflation control
- Economic growth
- Financial stability
If inflation rises: RBI hikes repo → borrowing slows → inflation cools
If growth slows: RBI cuts repo → loans cheapen → spending and investment rise
Repo rate is RBI’s primary economic steering tool.
How Repo Rate Affects You
Home Loan Borrowers
- Repo‑linked loans adjust fastest
- EMIs rise or fall within 1–3 months after a rate change
Fixed Deposit Investors
- FD rates usually move in the same direction, but more slowly
Business Owners
- Working capital and project finance costs track repo movements
A 0.50% repo change can materially alter long‑term loan affordability.
Repo Rate Transmission Timeline
| Loan Type | Typical Impact Time |
| Repo‑linked loans | 1–3 months |
| MCLR‑linked loans | 3–6 months |
| Fixed‑rate loans | No immediate change |
Repo Rate History: Context Matters
- 2020–21: Repo cut to 4.00% during COVID
- 2022–23: Repo hiked to 6.50% to fight inflation
- 2025: Gradual cuts as inflation cooled
- 2026: Repo stabilised around 5.25%
This places current borrowers well below peak rates, though above pandemic lows.
Repo Rate, Housing, and Construction Sectors
Repo rate movements influence housing demand, project launches, and construction activity.
Lower rates typically:
- Improve home loan affordability
- Support residential demand
- Strengthen construction and cement consumption
This is why sectors like housing, infrastructure, and materials closely track RBI policy decisions.
Factors To Consider
- Choose a repo‑linked floating rate
- Keep EMI within 30–35% of income
- Maintain a 6–9 month emergency buffer
Rate cycles always reverse. Buffers matter more than timing.
Repo rate is not just a policy number. It shapes borrowing costs, savings returns, and economic momentum. Understanding repo rate helps you plan loans with margin—not hope.
Disclaimer
This article is an explanatory guide based on publicly available RBI data, monetary policy statements, and widely accepted financial principles. Repo rate levels, policy stance, and transmission timelines can change with each RBI MPC meeting. Readers should verify current rates from official RBI communications and consult a qualified financial advisor before making borrowing or investment decisions.
FAQs: Repo Rate Explained
What is repo rate in simple terms?
Repo rate is the interest rate at which RBI lends money to banks, influencing all major loan rates.
Does repo rate affect home loans immediately?
Yes, especially repo‑linked loans, which reset quickly.
Is higher repo rate good or bad?
It helps control inflation but makes borrowing costlier.
Is lower repo rate always good?
It boosts growth but can raise inflation if overused.
Who decides repo rate in India?
The RBI’s Monetary Policy Committee (MPC).
How often is repo rate reviewed?
Every two months in MPC meetings.
Does repo rate affect FD rates?
Yes, indirectly and usually with a lag.
Where can I check the latest repo rate?
On the RBI website or MPC policy releases.
