Explainer: What Is Repo Rate And How Does It Impact The Average Consumer?
· Free Press Journal
The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) on Wednesday raised the repo rate by 25 basis points to 5.5%. This is the first hike in the policy rate since February 2023.
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While the rise or fall in the repo rate is generally linked to the rate at which the RBI lends to commercial banks in the country, it also impacts the general public through changes in loan interest rates and inflation.
What Is Repo Rate?
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term money to commercial banks against eligible securities. It is one of the central bank’s key tools for controlling inflation and influencing economic growth.
RBI MPC Raises Repo Rate By 25 Bps To 5.5%, Policy Stance Changed To ‘Calibrated Tightening'Think of it this way: when a bank needs funds, it can borrow from the RBI at the repo rate and repay the amount with interest.
If the RBI increases this rate, borrowing becomes more expensive for banks, which may pass on some of the additional cost to customers through higher lending rates.
How Does a Repo Rate Hike Affect You?
When the RBI raises the repo rate, loans such as home loans, car loans and personal loans can become more expensive. Borrowers with floating-rate loans linked to the repo rate are generally affected more quickly than those whose loans use other benchmarks.
For example, consider someone paying a monthly equated instalment (EMI) on a home loan. If the interest rate increases, the borrower may have to pay a higher EMI or continue with a similar EMI for a longer repayment period.
The actual impact depends on the loan amount, outstanding tenure, interest rate and lender’s reset mechanism.
Higher interest rates can also discourage households and businesses from borrowing and spending. This helps moderate demand and can ease inflationary pressure over time.
However, a repo rate increase does not automatically make every loan more expensive immediately. The effect depends on the type of loan and its interest-rate terms.
What Happens When the RBI Cuts the Repo Rate?
A repo rate cut generally makes borrowing cheaper for banks, potentially encouraging them to reduce lending rates. Lower borrowing costs can support home purchases, business investment and consumer spending, helping economic activity grow.
Rate changes can also influence fixed deposit returns. Banks may offer higher deposit rates when interest rates rise, although the timing and extent vary between lenders.
On October 7, 2026, the RBI raised the repo rate by 25 basis points to 5.50%. One basis point equals 0.01 percentage point. The decision reflects the RBI’s effort to contain inflation by making borrowing more expensive and moderating demand.