Key Terms & Concepts — UPSC Mains
Repo Rate
"The rate at which the Reserve Bank of India lends short-term money to commercial banks against government securities — the primary monetary policy tool for controlling inflation and liquidity."
The Repo Rate (Repurchase Rate) is the rate at which the Reserve Bank of India (RBI) provides short-term liquidity to commercial banks. In a repo transaction, commercial banks sell government securities (G-secs) to the RBI with an agreement to repurchase them at a later date at the repo rate. For commercial banks, this is essentially borrowing from the RBI at the repo rate using G-secs as collateral. The repo rate is the central tool of the RBI's monetary policy. When the RBI raises the repo rate: borrowing becomes more expensive for commercial banks; banks pass on higher costs to borrowers through higher lending rates (MCLR — Marginal Cost of Funds-based Lending Rate); credit demand slows; inflation is controlled. When the RBI cuts the repo rate: borrowing becomes cheaper; lending rates fall; credit demand increases; economic growth is stimulated. The Standing Deposit Facility (SDF) rate (introduced April 2022) — at which the RBI absorbs excess liquidity from banks without providing collateral — is now the floor of the Liquidity Adjustment Facility (LAF) corridor. The Marginal Standing Facility (MSF) rate — at which banks can borrow from the RBI against their SLR securities on an overnight basis — forms the ceiling. The reverse repo rate (at which RBI borrows from banks) was replaced by the SDF as the effective floor. Monetary Policy Committee (MPC): established under the amended RBI Act (2016), the MPC is a 6-member committee (3 RBI members including the Governor as ex-officio Chairperson + 3 external members nominated by the GoI) mandated to meet at least 4 times a year and set the policy repo rate to achieve the inflation target of 4% CPI (+/- 2 percentage points).
Critical for UPSC GS3 Economy (Monetary Policy). Prelims: repo rate, reverse repo rate, MSF rate, SDF rate, CRR, SLR — their definitions and relationships. MPC composition (6 members: 3 RBI + 3 GoI nominees). Inflation targeting framework. Mains: transmission of monetary policy (how repo rate changes reach home loan EMIs through MCLR); limitations of monetary policy (supply-side inflation, fiscal dominance); MPC's inflation target (4% +/- 2%).
- 1 Repo Rate: rate at which RBI lends to commercial banks against G-sec collateral
- 2 Monetary Policy Committee (MPC): 6 members (3 RBI including Governor + 3 GoI nominees)
- 3 MPC mandate: CPI inflation target of 4% (+/- 2%); meets minimum 4 times per year
- 4 Transmission chain: Repo Rate -> MCLR -> Home/Auto/Corporate loan rates
- 5 LAF corridor: SDF rate (floor) to MSF rate (ceiling); repo rate in the middle
- 6 SDF (Standing Deposit Facility): replaced reverse repo as effective floor rate (April 2022)
- 7 MSF (Marginal Standing Facility): emergency overnight borrowing by banks at penalty rate
- 8 Rate hike cycle 2022-23: RBI raised repo rate by 250 bps (from 4% to 6.5%) to combat post-COVID inflation
When India faced elevated CPI inflation of 7%+ in 2022 (above the RBI's upper tolerance band of 6%), the MPC raised the repo rate from 4% to 6.5% in a series of hikes between May 2022 and February 2023, making home loans and business credit more expensive, which eventually cooled demand-side inflation.