Monetary policy has a significant role in determining the economy of a nation, and central banks all over the world use different tools for controlling inflation, regulating liquidity, and ensuring financial stability.
Repo rate and reverse repo rate are among the most significant tools used by the Reserve Bank of India (RBI) to determine the manner in which money moves within the banking system. It also has an effect on interest rates, inflation, and growth in the economy.
To grasp these ideas, let us dissect them and see how they affect the economy, businesses, and individuals.
What Is Repo Rate
The repo rate, also known as the repurchase rate, is the rate at which commercial banks borrow money from RBI by selling government securities at a future date with an undertaking to repurchase them later.
In other words, when banks require short-term money, they approach RBI and offer government bonds as security. RBI advances money to them at some rate of interest, which is the repo rate. At the end of the repo period, banks repurchase their securities from RBI by paying back the borrowed money along with the interest.
The repo rate has changed over the years, reflecting economic conditions and the RBI’s monetary policy stance. During the pandemic (2020–2022), the repo rate was kept low to support economic recovery. However, with rising inflation, the RBI started increasing rates in May 2022. By March 2025, the repo rate stood at 6.25 per cent.
What Is Reverse Repo Rate
The reverse repo rate is the rate at which RBI borrows money from commercial banks. It happens when banks have excess money and lend it to RBI rather than to customers. In exchange, the RBI settles the interest on deposits with banks.
Reverse repo rate would typically be lesser than the repo rate and will be employed in order to absorb excess liquidity of the system for avoiding i
When the reverse repo rate rises, banks have a preference of keeping their spare funds with RBI instead of extending loans, thereby withdrawing liquidity from the market. If it is lowered, banks disburse more and add to the money supply of the economy.
The Indian reverse repo rate has varied markedly over the period. It had gone as high as 13.50 per cent in August 2000 and as low as 3.25 per cent in April 2009. It was 3.35 per cent as of February 2025. One of the significant dates was May 22, 2020, when RBI cut it by 40 basis points (bps) to 3.35 per cent to inject liquidity during the Covid-19 pandemic.
How Repo And Reverse Repo Rates Influence The Economy
Increased repo rates make borrowing expensive for banks, which subsequently raises interest rates on business and individual loans. This discourages excessive spending and borrowing, thereby curbing inflation. It also reduces economic activity.
Conversely, a cut in the repo rate lowers borrowing costs, leading to more expenditure and investment. This is helpful for improving economic growth, but might contribute to inflation if there is surplus money.
The reverse repo rate is the reverse of this. A higher reverse repo rate persuades banks to park excess money with the RBI, taking away money from circulation for lending. A lower reverse repo rate discourages banks from parking money with the RBI, making more money available in the market.
Historical Trends In Repo Rate
The repo rate has changed many times over the years:
For 2019, it had varied between 5.15 per cent and 6.25 per cent.
At the time of the pandemic, during 2020 and 2021, RBI lowered the repo rate to 4 per cent as a stimulus towards economic revival.
In 2022, when inflation pressure increased, the RBI began increasing the repo rate from 4.40 per cent to 5.90 per cent.
The initial hike was in May 2022, when the repo rate was increased to 6.50 per cent, in a bid to tighten liquidity.
By December 2022, the repo rate was 6.25 per cent, and in February 2023, it was increased to 6.50 per cent.
By February 2025, the repo rate was 6.25 per cent, after RBI cut it by 0.25 points.
Repo rate trends have tracked overall economic conditions. The repo rate was raised to 9 per cent after the 2008 financial crisis to slow down inflation. Conversely, it remained steady at 4 per cent for a very long time after May 2020, before the RBI began to raise it once again in 2022 to fight inflation.
When talking about the fluctuations in repo rate over the years and its probable evolution in 2025, Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat, said: "We will see a reduced interest rate trend of another 75 bps during the year, based on how we see the balance between global growth and domestic growth, with more growth needing to come from the domestic sphere.”
He added: “Beyond 2025, this trend depends on a lot of global geopolitical factors stabilising, which is very uncertain as of now, and we will need to wait and watch as to how the macro-economic factors play out.”
Effect On Loans And Deposits
As the repo rate increases, banks have to pay higher interest to borrow from RBI, causing the rate of interest on loans, such as home loans, car loans, and business loans to increase. For instance, in early 2024, the rate of interest for home loans varied between 8.40 and 9 per cent because of the high repo rate. If the RBI decides to lower the rates now, the cost of borrowing would come down, and loans would become cheaper.
Increased repo and reverse repo rates also affect savings accounts and fixed deposits (FDs). With increased rates, banks provide higher interest on savings accounts and FDs because they can earn more by parking their funds with the RBI. When the rate is cut, the banks lower the rate of interest on deposits, and the deposit rate on FDs and savings accounts become less attractive for consumers.
Role In Controlling Inflation
Repo and reverse repo rates are important instruments in managing inflation. When inflation increases, RBI increases the repo rate to reduce excessive borrowing and expenditure. When economic growth is sluggish and inflation is well within control, the RBI lowers the repo rate to stimulate borrowing and investment.
For instance, in early 2024, inflation was at 5.1 per cent, and it RBI decided to maintain the repo rate of 6.50 per cent. If, in 2025, the inflation drops below 4.5 per cent, the RBI might lower the rate to improve economic activity.
How RBI Decides On Rate Changes
The RBI’s monetary policy committee (MPC) meets every two months to review economic conditions and decide whether to adjust the repo and reverse repo rates. Some of the key factors influencing these decisions include: inflation trends, economic growth rates, global financial conditions, liquidity in the banking system, and government fiscal policies.
In 2024, the RBI kept the repo rate steady at 6.50 per cent, giving preference to managing inflation even when the economy was slowing. The central bank also watches out for how global central banks, including the US Federal Reserve, does on interest rates, which also determines foreign inflows into India.
Repo and reverse repo rates are potent instruments used by RBI to control liquidity, tame inflation, and moderate economic growth. These rates influence interest rates on loans and deposits, and overall economic activity.
Regarding the recent step by RBI to cut the repo rate by 0.25 per cent, Iyer said, "The repo rate reduction was a difficult decision, but a unanimous one, and signifies the regulatory commitment to growth while continuing to maintain a neutral stance on the rate path, to accommodate for any uncertainties that India may face on account of the second order impact of geopolitics.”
