What is repo rate in India?

Repo rate stands for “Repurchase Agreement” rate, and it is the rate at which the central bank of a country (in India’s case, the Reserve Bank of India) lends money to commercial banks. When the central bank lends money to commercial banks, it enters into a repurchase agreement, in which the bank agrees to repurchase the securities it has sold to the central bank at a future date at a higher price. The repo rate is the interest rate that the central bank charges the commercial banks for such short-term borrowing.

The repo rate is an important tool used by central banks to control the money supply in the economy. By changing the repo rate, the central bank can influence the amount of money that banks have at their disposal and, thus, the amount of credit that they can extend to borrowers. For instance, when the central bank lowers the repo rate, it becomes cheaper for commercial banks to borrow money, which in turn enables them to lend more money to consumers and businesses. This increased lending activity can stimulate economic growth. On the other hand, if the central bank raises the repo rate, it becomes more expensive for commercial banks to borrow money, which reduces their lending capacity and can have a cooling effect on the economy.