Repo rate

Repo is short for repurchase agreement. A bank that needs funds sells government securities to the RBI and agrees to buy them back after a fixed period, usually overnight, at a slightly higher price. The difference works out to the repo rate. Because the loan is backed by government securities, it is close to risk-free, which is why the repo rate anchors every other rate in the economy.

How the corridor works

The repo rate sits in the middle of a corridor. Above it is the marginal standing facility (MSF), where banks can borrow overnight at a higher rate when they are short of funds. Below it, since April 2022, is the standing deposit facility (SDF), where banks park surplus money with the RBI without having to post collateral. The RBI uses its liquidity operations to keep the overnight interbank rate, the weighted average call rate, close to the repo rate.

Who sets it

The Monetary Policy Committee has six members: three from the RBI, including the Governor, who has a casting vote, and three external members appointed by the central government. It meets at least four times a year, and in practice about every two months. Its job is to keep consumer price inflation near a target set by the government. The framework adopted in 2016 set that target at 4 percent, with a tolerance band of 2 to 6 percent.

How a change reaches borrowers and markets

Since October 2019, banks must link new floating-rate loans to individuals and small businesses to an external benchmark, usually the repo rate, and reset them at least once every three months. A repo change reaches these loans quickly. Older loans linked to a bank's MCLR adjust more slowly, and fixed deposits reprice only as they mature. Bond yields, company borrowing costs and the discount rates used in valuation respond too, at different speeds, as the analysis of interest rates and valuation explains.

Recent moves

In 2025 the RBI cut the repo rate by a total of 1.25 percentage points, to 5.25%. On 7 October 2026 it raised the rate by 0.25 points to 5.50%, its first increase since February 2023. The rate in force on any day is shown on the RBI's website, because it can change at every policy meeting.

Common mistakes

• Using the repo rate as the risk-free rate in a DCF. Valuations use the 10-year government bond yield, which reflects long-term expectations.
• Assuming every rate cut helps banks. Repo-linked loans reprice almost at once while deposits reprice slowly, so a cut can squeeze margins first, as the analysis of bank margins shows.
• Expecting an existing loan's EMI to change the next day. It changes at the loan's reset date, and many banks keep the EMI and change the tenure instead.

Questions investors ask

Does a repo rate cut reduce my home loan EMI? For a repo-linked loan, the rate falls at the next reset date. Your bank may lower the EMI, or keep it and shorten the tenure.

What is the difference between the repo rate and the reverse repo rate? The reverse repo rate is what the RBI pays when it borrows from banks against securities. Since April 2022 the floor of the corridor has been the SDF rate instead, and the fixed reverse repo is used only at the RBI's discretion.