Current Repo Rate in India
The current repo rate in India is 6.50% after the RBI increased the repo rate by 25 basis points on 8th February 2023 from the previous repo rate of 6.25%.
The Reserve Bank of India (RBI) typically changes the repo rate multiple times in a year. The RBI generally holds four bi-monthly monetary policy reviews in a financial year, during which the repo rate may be changed.
The central bank may also take additional steps outside of the regular monetary policy review cycle to change the repo rate.
What is Repo Rate?
Repo rate is a powerful tool used by central banks to control the economy and curb inflation. It is used along with other tools like the reverse repo rate, bank rate, CRR and more.
Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. A decrease in the repo rate helps banks to get money at a cheaper rate and vice versa.
How Does Repo Rate Work?
The working of repo rate is closely tied to the working of the economy as a whole.
One of the main functions of a central bank is to lend money to commercial banks to stimulate movement of the economy.
- All banks in India can approach the RBI and request for a loan in times of fund crunch.
- The RBI lends money to banks in the form of government bonds and treasury bills.
- The banks have to pay an interest on this loan – this interest rate is called the repo rate.
How Does Repo Rate Affect Inflation?
Inflation is a time of abnormally high prices.
This is caused by high purchasing power in the hands of the people. When the public has more money to spend, the demand for goods and services goes up, which results in an increase in prices.
In this situation, it is up to the government and the central bank to curb inflation by reducing the people’s purchasing power.
When the central bank increases the repo rate, commercial banks find it tougher to get money – this means that commercial and retail banks will be more hesitant to lend money to the public.
When loans are not made readily available to the public, purchasing power comes down – this has a chain effect in the economy which eventually brings prices down.
Repo Rate vs Reverse Repo Rate
| Repo Rate | Reverse Repo Rate |
| Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. | Reverse Repo Rate is the rate at which the Reserve Bank of India (RBI) borrows money from commercial banks. |
| An increase in the repo rate means that the commercial banks will have to pay more interest on the money they borrow from the RBI. | An increase in the reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market. |
Repo Rate vs MCLR Rate
Repo Rate and Marginal Cost of Funds based Lending Rate (MCLR) are two important monetary policy tools used by the Reserve Bank of India (RBI) to regulate the liquidity situation in the country.
| Repo Rate | Marginal Cost Lending Rate |
| Repo rate is the rate at which RBI lends money to commercial banks in case of a shortage of funds. | MCLR is the minimum interest rate at which a commercial bank can lend money to its customers. |
| A higher repo rate makes borrowing from RBI more expensive for commercial banks. | A higher MCLR rate makes borrowing from banks more expensive for customers. |
An increase in the Repo Rate will lead to an increase in the MCLR rate. This is because when RBI hikes the Repo Rate, banks have to pay more to borrow from the RBI.
As a result, they will increase the MCLR rate to compensate for the increased cost of borrowing.
When the MCLR is high, people will hesitate before borrowing money from banks, once again leading to lower purchasing power.
The Bottom Line
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FAQs
What is the latest repo rate?
The current repo rate in India is 6.50% after the RBI increased the repo rate by 25 basis points on 8th February 2023 from the previous repo rate of 6.25%.
What is repo rate and reverse repo rate?
Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks.
Reverse Repo Rate is the rate at which the Reserve Bank of India (RBI) borrows money from commercial banks.
Why is RBI increasing repo rate?
The RBI increases repo rate to curb inflation. When the central bank increases the repo rate, commercial banks find it tougher to get money – this means that commercial and retail banks will be more hesitant to lend money to the public.
