repo rate

The repo rate (repurchase rate) is the policy interest rate at which the Reserve Bank of India (RBI) provides overnight or short-term liquidity to scheduled commercial banks against the collateral of approved securities, primarily Government of India dated securities and Treasury Bills, under a repurchase agreement. The borrowing bank sells eligible securities to the RBI and simultaneously agrees to repurchase them at a pre-determined future price; the difference reflects the interest charged. Statutory authority flows from the RBI Act, 1934, and the rate is fixed by the Monetary Policy Committee (MPC), a six-member body constituted under the amended RBI Act following the Finance Act, 2016, which gave statutory backing to the Monetary Policy Framework Agreement of February 2015. The MPC operates under a flexible inflation-targeting mandate, with the medium-term Consumer Price Index (CPI) target fixed at 4 per cent with a tolerance band of +/- 2 per cent, notified for the period 2021-2026.

The repo rate is the principal instrument of monetary transmission and anchors the Liquidity Adjustment Facility (LAF) corridor. The reverse repo rate (the rate at which RBI absorbs liquidity from banks) forms the floor, while the Marginal Standing Facility (MSF) rate, typically 25 basis points above the repo rate, forms the ceiling; the Standing Deposit Facility (SDF), introduced in April 2022, now serves as the effective floor of the corridor. When the RBI raises the repo rate (monetary tightening or a contractionary stance), borrowing becomes costlier for banks, lending rates rise, credit growth and aggregate demand moderate, and inflationary pressure is contained. A cut in the repo rate (an accommodative stance) cheapens credit and stimulates investment and consumption. The transmission to lending rates was strengthened by the External Benchmark Lending Rate (EBLR) regime mandated from October 2019, replacing the earlier MCLR-based internal benchmarks for retail and MSME loans.

In response to the COVID-19 shock, the MPC slashed the repo rate to a historic low of 4.00 per cent in May 2020. As inflation surged past the upper tolerance band, the RBI began tightening from May 2022, raising the rate in successive steps to 6.50 per cent by February 2023, where it was held through 2024. In 2025 the MPC pivoted to easing as inflation softened, and as of early 2026 the repo rate stands in the easing phase of the cycle, with the precise figure set by the most recent bi-monthly MPC review. The MPC meets at least four times a year, and its decisions, taken by majority vote with the Governor holding a casting vote, are published with minutes after fourteen days.

For UPSC aspirants, the repo rate is a high-frequency topic in Prelims (General Studies Paper I) and Mains General Studies Paper III (Indian Economy — monetary policy, inflation, financial markets). Typical Prelims questions test the distinction between repo, reverse repo, MSF, SDF, CRR and SLR, and the composition and mandate of the MPC. Mains questions probe monetary transmission, the effectiveness of inflation targeting, and the interplay between fiscal and monetary policy. Candidates must precisely distinguish quantitative tools (CRR, SLR, Open Market Operations) from the price-based repo rate.