Repo Rate

Full form: Repurchase Rate

Banking

Repo rate is the interest rate at which RBI lends short-term funds to commercial banks. It is the primary monetary policy tool -- raising the repo rate makes borrowing expensive (controls inflation); cutting it makes borrowing cheaper (stimulates growth). All floating-rate loans in India ultimately trace their cost to the repo rate.

In detail

The repo rate mechanism: banks borrow from RBI at the repo rate to meet short-term fund requirements. When RBI raises the repo rate, banks' cost of funds rises, which they pass on to customers as higher lending rates. Reverse repo rate (currently repo - 0.25%) is the rate at which RBI borrows from banks.

Current rate (2024): 6.5%. RBI has been on hold since February 2023 after raising rates by 250 basis points to control post-COVID inflation.

Impact on you: a 1% repo rate cut on a Rs 40L home loan over 20 years saves approximately Rs 2.8 lakh in total interest. Always track RBI MPC meetings.

Formula

RLLR (your loan rate) = Repo rate + Bank spread Bank spread = typically 2.5-4% above repo Your EMI changes with each RLLR reset (every 3 months)

Real-life example

🇮🇳 India example

Repo rate timeline: April 2022 = 4%, by February 2023 = 6.5% (250 bps hike to control inflation). Home loan rates moved from 6.7% to 9.5% in the same period. A Rs 40L home loan EMI went from Rs 30,600 to Rs 35,900 -- Rs 5,300/month increase purely from repo rate movement.

Frequently asked questions

What is the difference between repo rate and bank interest rate? ▼

Repo rate is the rate at which banks borrow from RBI. Banks then add their spread (2.5-4%) to set customer lending rates. If repo is 6.5% and bank spread is 2.65%, your home loan is at 9.15% (RLLR). Each bank sets its own spread which is fixed at loan origination -- only repo changes with RBI policy.