The repo rate, short for “repurchase agreement o repurchase option,” is the rate at which the RBI lends to financial institutions and commercial banks against securities.
The repo rate is one of the many monetary policy tools utilised by the RBI to control the money supply in the economy. Repo rate eventually impacts the level of inflation.
By changing the rate of borrowing for commercial banks, the central bank uses the repo rate to influence the interest on loans and savings that commercial banks offer to their customers.
When inflation is high, the RBI maintains a higher repo rate. This means more interest on loans and savings. This reduces borrowing and increases saving, leading to lower inflation.
During low inflation periods, the RBI lowers the repo rate, which leads to a decrease in interest on loans and savings. This increases borrowing and spending, leading to higher prices.
The decision regarding the repo rate is made by the RBI’s Monetary Policy Committee (MPC) to ensure that inflation remains around 4% with an upper and lower margin of 2%.
In the June 2024 MPC meeting, the RBI kept the repo rate unchanged at 6.50% for the sixth consecutive time.