Executive Summary

The repo rate—the rate at which the RBI lends short-term funds to commercial banks—remains the central tool of India’s monetary policy. It influences inflation, liquidity, borrowing costs and ultimately the pace of economic growth. This article provides a detailed analysis of how the repo rate works in India, recent developments (2025), challenges, and what to watch going forward.

What Is the Repo Rate?

The repo rate is defined as the rate at which the RBI lends money to commercial banks against government securities for short durations. When banks sell securities to the RBI and agree to repurchase them later, the interest implied is the repo rate.

In essence:

• Higher repo rate → borrowing from RBI becomes more expensive → banks may reduce lending → demand can slow → inflation can moderate.

• Lower repo rate → borrowing becomes cheaper → banks may expand lending → demand and growth may rise, but inflation risk may increase.

Thus, the repo rate is a policy lever for controlling both inflation and growth in India.

Why the Repo Rate Matters

This rate matters because it influences multiple facets of the economy:

• Inflation control: A higher rate raises the cost of credit, restraining demand when inflation is above the RBI’s comfort zone.

• Growth stimulation: A lower rate can reduce borrowing costs for businesses and households, supporting investment and consumption.

• Currency/Capital flows: A higher domestic rate can attract foreign inflows, support the rupee, but may dampen domestic growth if overdone.

• Cost of borrowing: Loan interest rates in India are influenced by overnight/bank funding costs which in turn reflect the repo rate environment.

Historical Evolution of the Repo Rate in India

This evolution reflects how the RBI adjusts policy in response to domestic inflation, growth trajectory, global conditions and liquidity.

Repo Rate vs Reverse Repo & Liquidity Corridor

• Repo Rate: Rate at which RBI lends funds to banks.

• Reverse Repo Rate / SDF Rate: Rate at which banks lend funds to RBI (or RBI absorbs funds). For example, as of June 2025 the SDF (Standing Deposit Facility) rate is 5.25%.

• These form part of the Liquidity Adjustment Facility (LAF) corridor, with the repo rate effectively in the middle, SDF as floor, MSF/Bank Rate as ceiling.
  Understanding this corridor is key to grasping how RBI controls short-term interest rates and liquidity.

Repo Rate and the Inflation Targeting Framework

Since 2016, India operates under an Inflation Targeting Framework, with the Monetary Policy Committee (MPC) of the RBI mandated to keep headline CPI inflation near 4% with a tolerance band of ±2%.
Under this setup, the repo rate is the primary signalling tool of monetary policy. Lending rates, deposit rates, bond yields and credit flows respond to changes in the policy rate.
The MPC meets bi-monthly, analyzing inflation, GDP growth, global developments and the liquidity environment.

Recent Policy Developments (2024-25)

• On 6 June 2025, the RBI cut the repo rate by 50 basis points to 5.50% amid subdued inflation, to support growth.

• On 1 October 2025, the MPC kept the repo rate unchanged at 5.50%, and retained the policy stance as “Neutral”.

• According to the October 2025 policy release:

  • GDP growth forecast for FY2025-26 revised upwards to 6.8% from ~6.5%.

  • Inflation forecast (CPI) revised down to around 2.6% for FY2025-26.
    These figures show that RBI sees inflation as well-contained and growth momentum moderate but resilient.

Impact of Repo Rate Changes on the Indian Economy

1. Inflation and Price Stability

When inflation exceeds the tolerance band, RBI may raise repo rate to curb demand. Conversely, when inflation is moderate (as in 2025) and growth is still strong, it may cut or hold the rate. The June 2025 cut reflected this environment of moderate inflation and need for growth support.

2. Borrowing and Lending Rates

A decline in the repo rate generally lowers banks’ cost of funds, which can translate into lower loan interest rates for households and businesses (subject to transmission). For example, banks announced reductions in home-loan rates after the June rate cut.
However, transmission is not instantaneous—it depends on bank deposit structures, legacy loans, and other factors.

3. Investment and Consumption

Lower borrowing costs can boost housing, consumer durables, industrial investment and thereby growth. On the flip side, if the repo rate is raised, borrowing costs rise and some sectors (auto, housing, MSME) can slow.

4. Currency and Capital Flows

A higher domestic rate can attract foreign portfolio investment (FPI) seeking yield, supporting the rupee. But if rates are too high relative to growth prospects, investment sentiment may suffer.

Challenges in Using Repo Rate as a Policy Tool

• Transmission Lags: Even when the RBI cuts or raises the repo rate, banks may be slow to adjust lending rates.

• Global Spillovers: Imported inflation (oil/commodities), global rate shifts, supply shocks can constrain RBI’s ability to manage inflation via domestic policy alone.

• Fiscal Policy Interaction: Large government borrowing can offset monetary policy, influencing liquidity and interest rates.

• Structural Liquidity Conditions: Excess liquidity or deficit liquidity can damp the intended impact of repo-rate changes.

Global Comparison: India vs Other Economies

India’s policy rate is relatively higher than many peers, reflecting its dual mandate of inflation control and growth support in a high-potential emerging economy.

Forward Outlook (2025-26)

Given the current backdrop—repo rate at 5.50%, inflation well under control, GDP growth forecast elevated—the RBI’s likely policy path is:

• Hold the repo rate at 5.50% through at least mid-2026, barring major inflation or global shocks.

• Monitor transmission of earlier cuts into credit, growth and inflation.

• If inflation remains benign and growth flags, consider selective cuts.

• If inflation gathers or external risks intensify (commodity shock, global rate spike), RBI may tighten or maintain higher rates.
  This forward view should be treated as an analyst projection, not a guarantee.

Conclusion

The repo rate remains the linchpin of India’s monetary policy framework. At 5.50% (as of October 2025) and with a neutral stance, the RBI is signaling a balanced approach—supporting growth while anchoring inflation expectations. For borrowers, investors, businesses and policy watchers, understanding the repo rate means understanding a major lever that influences credit, prices and economic momentum.

Key Takeaways

• Current Repo Rate (Oct 2025): 5.50%

• Policy Stance: Neutral

• Inflation Target Framework: 4% ±2%

• Major Recent Move: 50 bps cut on 6 June 2025 to 5.50%

• Next Watch-points: Transmission of rate cuts, global commodity/ inflation shocks, fiscal policy stance.