Repo rate stands for Repurchase Option Rate. In India, the Reserve Bank of India (RBI) lends money to commercial banks at this interest rate. Essentially, the central bank uses the repo rate as an instrument to manage the economy and financial markets. Looked at in another way, the repo rate refers to the rate at which the RBI lends money to commercial banks in exchange for government securities. Commercial banks borrow from the RBI to meet their liquidity requirements or for other statutory measures.
The repo rate is one of the most important tools used by the RBI to manage the money supply in the economy and, in turn, control inflation. While managing the supply of money and controlling inflation may sound complicated, this blog aims to simplify these concepts for you.
Key things to note
The repo rate, short for repurchase rate, often appears in macroeconomic and banking conversations. It refers to the interest commercial banks pay to RBI for overnight loans secured by government securities.
RBI uses the repo rate to control the money supply in the economy. The repo rate is a benchmark interest rate used by the Reserve Bank of India (RBI) to facilitate the smooth operation of the monetary system. RBI increased repo rates several times in 2022, while the final RBI rate hike was in February 2023.
- Historically speaking, India maintained a stable 4% repo rate from May 2020 to April 2022. In May 2022, the RBI hiked the repo rate by 40 basis points to 4.40% to control inflation. One basis point is one-hundredth of a percentage point.
- The May 2022 repo rate hike was followed by 5 more hikes, taking the repo rate to the current level, which is 6.5%. The last repo rate hike was in February 2023.
- Changes in the repo rate have their impact beyond the give-and-take relationship between the RBI and commercial banks. The change in rates also influences other rates and reserve ratios.
RBI repo rate cut history (2019-2024)
The central bank uses the repo rate to control the money supply in the economy. RBI increases repo rate to control inflation—a sustained rise in prices of goods. Likewise, RBI reduces repo rates when it wants to increase money supply in the economy. Essentially, a lower repo rate translates to cheaper borrowing for businesses and individuals. Here is the RBI repo rate history from 2019 to 2024:
| Date | Repo Rate | Change |
| 8 June 2023 | 6.50% | Unchanged till date |
| 8 February 2023 | 6.50% | +0.25% |
| 7 December 2022 | 6.25% | +0.35% |
| 30 September 2022 | 5.90% | +0.5% |
| 5 August 2022 | 5.40% | +0.5% |
| 8 June 2022 | 4.90% | +0.5% |
| May 2022 | 4.40% | +0.4% |
| 09 Oct 2020 | 4.00% | 0.00% |
| 06 Aug 2020 | 4.00% | 0.00% |
| 22 May 2020 | 4.00% | 0.40% |
| 27 March 2020 | 4.40% | 0.75% |
| 6 February 2020 | 5.15% | 0.25% |
| 07 August, 2019 | 5.40% | 0.35% |
| 06 June, 2019 | 5.75% | 0.25% |
| 04 April, 2019 | 6.00% | 0.25% |
| 07 February, 2019 | 6.25% | 0.25% |
Impact of repo rate hike on various facets of India’s economy
Changes in repo rate have an outsized influence on our everyday lives, not to mention their impact on economic growth. For instance, it directly impacts your fixed deposit rates and decide how much you pay by way of home loan EMIs.
When RBI increases repo rate, it helps to curb inflation and lower demand. Let us understand how inflation impacts different aspects of our lives.
> Impact on Economic Growth
Businesses have to pay more to service their loans when the RBI raises the repo rate. Thus, firms cut back on borrowing to fund their expansion plans and their growth rate slows down. Companies has less cash flow, which causes stock prices to drop.
Businesses are the lifeblood of an economy and a slowdown in their growth will trickle down to reduced economic activity. GDP, which reflects the level of economic activity, is the total value of goods and services produced in an economy during a specific period. Consumers also tend to reduce spending on non-essential things as the cost of money goes up, thus impacting overall economic growth.
> Impact on Inflation
RBI increases repo rate to control inflation in the economy. This is because a higher repo rate means a higher cost of borrowing for the banks. Banks will pass the higher cost of borrowing to their customers, leading to an increased cost of borrowing for people.
The increased cost of borrowing will reduce the supply of money in the economy, leading to a decrease in demand and eventually a reduction in inflation. To boost growth, the RBI cuts the repo rate to reduce the cost of borrowing and boost liquidity in the economy.
> Impact on Loans & EMIs
An RBI rate hike has a direct effect on loan repayments. When banks have to pay more to borrow money from the RBI, they pass on the cost to borrowers by raising interest rates on loans. If the repo rate goes up, it might not affect the interest rates on loans right away. But when the loan’s reset date comes around, the interest rate could go up. People who take out loans would find it harder to pay them back now that EMIs are higher.
> Impact on Deposits & Fixed Deposit Rates
An RBI rate hike can push up bank interest rates. Since banks need more money, they raise interest rates on products like fixed deposits to attract more deposits. If the repo rate goes up, it might not have an instant effect on FD and deposit rates. However, the interest rates on renewed deposits will go up.
> Impact on Mutual Funds
Mutual funds invest in stock markets and stock markets consist of companies. When repo rates go up, firms reduce their growth spending which impacts their profits. Corporate profits are important drivers of stock market and thus, a repo rate hike indirectly impacts mutual funds that invest in companies that trade on stock markets.
Going by repo rate history, customers with short- to medium-term investments, such as savings accounts and fixed deposits, may profit from higher interest rates.
> Impact on Savings
Higher rates work well for people who depend on returns from their bank deposits for their livelihood. Savings instruments generally pay a lower rate of interest and a repo rate hike would push up the rate.
> Impact on Consumer Spending
When RBI increases repo rate, it can have a significant impact on how much you spend as a customer. When the repo rate goes up, consumers will have to shell out more on housing and car loans. As the cost of money goes up, consumers tend to postpone their big-ticket purchases and spend less on non-essential things.
Conclusion
RBI rate hike can impact your life in more ways than one. As repo rates change, so does the interest rate on your home loan. Repo rates tend to go up when inflation is high and go down when growth is low. When RBI increases the repo rate, its effects percolate down to different facets of the Indian economy.
