Current Repo Rate & Reverse Repo Rate in India 2025 Explained

What is REPO rate?

Repo rate is the rate of Interest in which Reserve Bank of India lends money to Commercial Banks in India. This monetary policy tool is used by RBI worldwide to regulate the money supply in the economy. This influences the lending and deposit interest rates offered by various banks and NBFCs. Any changes made in the REPO rate directly influences loan EMIs and savings return. This makes it crucial for individuals to stay updated with the current REPO rates. A perfect understanding of the REPO rate will give you an idea of the economic policies framework in the country.

How REPO Rate Works?

The REPO rate or the Repurchase rate as it is otherwise called is the interest rate at which the Reserve Bank lends money to Commerical banks and financial institutions in the country in exchange of securities. It serves as a key monetary policy tool to manage liquidity, inflation, and economic growth. Changes in REPO rate directly affect borrowing costs for banks, that also influences the interest rates on the loans and the deposits of consumers. Reserve Bank of India uses the REPO rate to maintain economic stability and control inflation that also boosts the economic growth of the country.

Why is REPO rate Important?

The REPO rate that is set by RBI is crucial as it influences the borrowing costs and liquidity in the economy. When the REPO rate is high, banks find borrowing from the RBI expensive. This leads to higher interest rates for consumers. This will help in controlled spending along with a measure to control the inflation level. On the contrary if the REPO rate is low, the borrowing for the banks will be cheaper that will in turn increase the interest on deposits and reduce loan rates for consumers. This will encourage investments and spending and boost economic growth. It is one of the important policy tools that is adopted by the RBI to control liquidity, manage inflation, and that will ensure economic stability.

Calculation of REPO Rate?

The REPO rate is calculated by the RBI based on several economic factors to control inflation and support economic growth. Some of the pointers that are taken into consideration includes:

• Inflation Trends: Examine the fluctuation in the price over a period of time and their impact in the economy. The impact of rising and falling inflation affecting purchasing power and how policymakers respond to the various price changes in the market are also discussed.
• Economic Development and Expansion: Understand the GDP growth that reflects on the economic health and expansion. The contribution of various industries towards the overall economic development is also discussed.
• Banking System Liquidity Requirements: Explore the liquidity needs of the banking sector and the demand for credit in economy. The availability of funds in the financial system and their influences in the lending behavior
• External Economic Influences: Take a complete evaluation of the global economic condition and how the various foreign investments are working in the domestic environment. Also understanding the various global economic factors like international policies, trade wars shape the domestic economic conditions.

What is the Current REPO Rate of India?

An agreement between the Reserve Bank of India and the commercial bank will be made for the repurchase of securities at a predetermined price. This is done when there is a shortage of funds or the liquidity needs to be maintained during the market conditions. The RBI makes use of the REPO rate to control inflation rates.

The Monetary Policy Committee reduced the REPO rate by a 25 basis points from the acceptable 6.50% making the current REPO rate to 6.25%. The Reverse REPO rate stands at the same 3.35%. The bank rate and the Marginal Standing Facility (MSF) rate changed to 6.50%. The Standing Deposit Facility rate is at 6.00%.

Historical Repo Rates in India (2006 - 2024)

The RBI has adjusted the repo rate multiple times between 2006 and 2024. The repo rate is the interest rate at which the RBI lends money to commercial banks, serving as a vital tool for controlling inflation and ensuring liquidity in the economy. Below is a chronological list of the repo rate changes during this period:

How REPO Rate Affects Economy?

The following are the broad perspective on the basis on which REPO rate affects the economy. They are:

Influencing Interest Rates:

There is a repercussive effect of change in the REPO rate in the financial sector. If the REPO rate is increased, commercial banks will increase the lending loan rates and the interest on savings and fixed deposits. This will have a negative effect on the total spending that is been exhibited by the common man as borrowing loans will be expensive in terms of homes, cars, and investments.

Controlling Inflation:

The increase or decrease in REPO rate affects the economy. When the economy is growing and there is a price rise everywhere, RBI may increase the REPO rate. This will make borrowing expensive and can slow down the spending and control the inflation level. But on the contrary if the inflation level in low, RBI might lower the REPO rate that will encourage borrowing and spending.

Impact on Savings:

Changes in the repo rate also affect savings. When the RBI raises the repo rate, banks tend to offer higher interest rates on savings accounts, which is good news for savers. Conversely, when the repo rate drops, savings account interest rates may also decrease, leading to lower returns on your savings.

Exchange Rate:

The REPO rate also has some effect on exchange rates. A higher REPO rate can attract foreign investors who are looking for better returns. This will help in the appreciation of the Rupee value in the global market. A lower REPO rate will have the inverse effect of discouraging foreign investments and leading to a weaker economy.

Investment and Growth Rate:

Business relies on funds for their expansion and growth. When the REPO rate is high, borrowing becomes expensive and as a result business will cut down on their investments and manage with their own funds. A lower REPO rate can encourage business to borrow and invest in growth that boosts economic activity.

What is Reverse REPO Rate?

The Reverse REPO rate is the rate in which the Reserve Bank of India borrows money from commercial banks in exchange of some Government securities. In other words. Reverse REPO rate works just opposite to REPO rate. This happens when there is excess liquidity in the system.

The Reserve Bank of India uses the Reverse REPO Rate as a tool to control inflation and manage liquidity in the economy. When the RBI feels that there is excessive fund outflow in the finacial market, it increases the REPO rate. This encourages banks to invest their money in the RBI in exchange for some government securities.

Difference Between REPO Rate and Reverse REPO Rate

The following table enlists in detail about the differences between the REPO rate and Reverse REPO Rate.

conclusion:REPO rate and Reverse REPO rate are effective economic tools of the Reserve Bank of India to regulate the economy and ensure stability in the market. The REPO rate tries to control inflation by taking care of borrowing costs and liquidity in the market. The Reverse REPO Rate plays a vital role in managing excess liquidity by encouraging banks to invest their excess funds in RBI. These rates help the RBI to boost the economy towards sustainable growth, and control inflation. A thorough knowledge of these rates is necessary for business, investors, and consumers to navigate the financial landscape.

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