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
- 9 Rate cut cycle 2025: RBI cut repo rate from 6.5% → 6.25% (Feb 2025) → 6.0% (Apr 2025) → 5.5% (Jun 2025, 50 bps) → 5.25% (Dec 2025), cumulative 125 bps easing [Source: RBI / Bajaj Finserv, Dec 2025]
- 10 Current repo rate (May 2026): 5.25%, held unchanged at April 2026 MPC meeting; neutral stance maintained [Source: BusinessToday, Apr 8, 2026]
- 11 CPI inflation: fell to record low of 0.25% in October 2025; has remained below 4% target since February 2025 [Source: RBI data]
The RBI's 2025 rate-cut cycle, its most aggressive since 2019, lowered the repo rate cumulatively by 125 bps from 6.5% (Jan 2025) to 5.25% (Dec 2025), in five steps: Feb, Apr, Jun (50 bps cut), Oct (hold), Dec 2025. By April 2026, the MPC held the rate at 5.25% with a neutral stance, monitoring whether earlier cuts had adequately transmitted into lending rates through the MCLR channel.
