Repo rate
The rate at which the central bank lends money to banks for a very short term against approved securities — the main lever it pulls to make money cheaper or dearer.
In plain language
A bank that is short of cash for a day or two can go to the Reserve Bank of India, hand over approved securities, and borrow — with a promise to buy the securities back. That is a repo (repurchase) transaction, and the interest charged is the repo rate.
Because every bank's marginal cost of money depends on it, the repo rate ripples outward into deposit rates, loan rates, bond yields and, eventually, how much people borrow to buy homes and cars.
How it works
Section 5.3.7 lists the central bank's tools for controlling money supply and interest rates:
| Tool | What it is (workbook) |
|---|---|
| Repo rate | Applied when the central bank lends against securities — it buys approved securities with a promise to resell, placing money with financial institutions for a very short term |
| Reverse repo | Applied when the central bank borrows against securities |
| Bank Rate | The rate at which the central bank lends to commercial banks without collateral, for medium to long term or emergency needs |
| CRR | Minimum percentage of total deposits banks hold as cash reserves with the central bank |
| SLR | Minimum percentage of total deposits banks hold in cash equivalents such as gold and government securities |
Direction. Expansionary monetary policy increases money supply and reduces interest rates; contractionary policy slows money supply and raises them.
Why analysts track it. Chapter 5 says inflation tells you whether a central bank has room to cut rates when the economy is shrinking, and that low inflation in the recovery phase lets it loosen policy. Chapter 6 notes that bank funding costs depend heavily on central bank policy rates. Higher rates hit real estate and autos hardest, because middle-class buyers borrow to buy them.
A worked example
Illustrative rates — not the current policy rate. A bank borrows Rs 5,000 crore overnight from RBI under repo.
At 6.00%: 5,000 × 6.00% ÷ 365 = Rs 0.8219 crore ≈ Rs 82.19 lakh for one day
At 5.75%: 5,000 × 5.75% ÷ 365 = Rs 0.7877 crore ≈ Rs 78.77 lakh for one day
Saving from a 25 bp cut ≈ Rs 3.42 lakh a day
If the bank passes the cut through to a home loan of Rs 50 lakh, first-year interest (ignoring repayments) falls from 8.50% = Rs 4,25,000 to 8.25% = Rs 4,12,500 — Rs 12,500 less. Across lakhs of borrowers, that is how a policy decision in Mumbai turns into more home and car purchases, which is why Chapter 5 singles out real estate and autos as rate-sensitive sectors.
Why NISM asks about it
Chapter 5 (Economic Analysis), section 5.3.7, lists repo, reverse repo, Bank Rate, CRR and SLR as monetary policy tools, and section 5.4 explains how interest rates and inflation feed an analyst's view of the economy. Chapter 6 lists central bank policy rates and CRR/SLR among the metrics to track for banks and NBFCs.
Common exam traps
- Repo: the central bank lends. Reverse repo: the central bank borrows. Reversing these is the classic error.
- Bank Rate is lending without collateral, for medium to long term or emergencies; repo is short-term and against securities.
- CRR and SLR are ratios of deposits, not interest rates. CRR is held as cash with the central bank; SLR in cash equivalents such as gold and government securities.
- A repo cut is expansionary; a hike is contractionary.
- Stale in the workbook — the floor of the corridor. The workbook presents reverse repo as the central bank's borrowing tool. Since April 2022 RBI has used the Standing Deposit Facility as the floor of its liquidity adjustment facility, with the fixed-rate reverse repo no longer the floor. Answer the exam from the workbook's table.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Bank RateThe rate at which the central bank lends to commercial banks without collateral, for medium to long-term or emergency needs — one of RBI's tools for controlling money supply and rates.
- Demand-pull inflationInflation caused by demand running ahead of the supply available to meet it — too much money chasing too few goods.
- Fiscal deficitThe budgeted excess of the government's expenditure over its revenues in a year, usually stated as a percentage of GDP and bridged by borrowing.
- InflationA sustained general rise in the price level, which erodes what a rupee buys — and the reason a nominal return has to be deflated before it means anything.
- Monetary policyThe central bank's management of money supply and interest rates to promote growth and hold prices stable — expansionary when it wants to push the economy up, contractionary when it wants to cool it.
- Reverse repoThe transaction where the central bank borrows money from banks against securities, paying interest on it — the mirror image of a repo, where the central bank instead lends.
- Leading economic indicatorA measure of economic recovery that improves before the actual economy does, because it reflects expectations for the future rather than current or past activity — and the workbook names the stock market itself as one.
- CRRThe minimum percentage of a bank's total deposits that it must hold as cash reserves with the central bank, earning no interest — one of RBI's tools for controlling money supply.
- SLRThe minimum percentage of a bank's total deposits it must hold in cash equivalents such as government securities and gold, rather than as cash — a companion tool to CRR.
- Fiscal policyThe government's measures on its own revenues and expenses — taxation and spending — used to influence aggregate demand, savings, investment and overall economic activity.
- RepoA ready forward contract: borrowing money by selling securities with an agreement to buy them back later at a higher price that includes the interest.
- Floating rate loanA loan whose interest rate is reset periodically in line with the benchmark it is linked to — such as the repo rate or a bank's MCLR — so the EMI or tenure changes as rates move.