Contents
Definition
The repurchase rate (repo rate) is the rate at which the Reserve Bank of India (RBI) provides overnight liquidity to commercial banks against collateral of eligible government securities under a repurchase agreement. Under the Liquidity Adjustment Facility (LAF), banks borrow from RBI at the repo rate for one day and agree to buy back (repurchase) the securities the next business day. The repo rate is set by the six-member Monetary Policy Committee (MPC), constituted under Section 45ZB of the RBI Act, 1934 (as amended in 2016). The MPC meets six times a year (every two months) and decides the policy rate by majority vote; the Governor holds a casting vote. The current repo rate is 6.50% (as of the April 2024 MPC meeting). Repo rate is the upper bound of the interest rate corridor; the Standing Deposit Facility (SDF) rate (repo minus 25 bps = 6.25%) is the floor.
How It Operates
The transmission mechanism from repo rate to the broader economy works through several channels:
- Bank borrowing costs: Banks that borrow from RBI under LAF pay repo rate. This sets the floor for banks' own marginal cost of funds.
- MCLR and EBLR: Rising repo → rising MCLR (lagged 1–2 quarters) and rising EBLR-linked rates (lagged ≤ 3 months). Falling repo → lower lending rates, stimulating credit.
- Deposit rates: Banks raise deposit rates when their marginal funding cost (partly repo-driven) rises, benefiting FD investors.
- Bond yields: Repo rate changes shift the short end of the yield curve immediately; long-end G-Sec yields respond based on inflation and growth expectations.
- Exchange rate: Higher repo attracts carry trade flows, supporting the INR. Rate cuts can weaken INR through capital outflow risk.
MPC decisions are published at 10:00 AM IST on the resolution day of each MPC meeting, with detailed minutes released 14 days later at rbi.org.in.
Why It Matters for Investors
- Fixed deposits: Bank FD rates are strongly correlated with repo rate. A 250 bps rate hike cycle (2022-23) saw SBI 1-year FD rates rise from ~5.1% to ~6.8% — a 170 bps pass-through over ~3 quarters.
- Debt mutual funds: Rate hikes compress existing bond prices (inverse price-yield relationship). Short-duration funds outperform in a hike cycle; long-duration and gilt funds benefit in a cut cycle.
- Equity valuations: Higher rates increase the discount rate used in DCF models, compressing P/E multiples — especially for long-duration growth stocks. Rate cuts are generally bullish for equities.
- Home loans: EBLR-linked home loans (post-October 2019) reprice within 3 months of a repo change; MCLR-linked legacy loans reprice at annual reset date.
Current Value + Recent History
As of April 2024 MPC, repo rate is at 6.50% — unchanged for six consecutive meetings since February 2023, after a cumulative 250 bps hiking cycle from May 2022 to February 2023. The cycle began with an off-cycle emergency hike of 40 bps on 4 May 2022 (repo moved from 4.00% to 4.40%), followed by 50 bps in June, 50 bps in August, 50 bps in September, 35 bps in December 2022, and a final 25 bps in February 2023. The MPC shifted to "withdrawal of accommodation" stance post-April 2022 and "neutral" stance in October 2023. Consensus expectation as of mid-2024 is for 50–75 bps of cuts beginning Q3/Q4 FY2025, contingent on CPI sustainably reaching the 4% target.
Worked Example
Tracing the 2022-23 rate cycle impact across asset classes:
- May 2022: Emergency hike; repo goes from 4.00% → 4.40%. 10Y G-Sec yield jumps 20 bps to 7.40% in a single session. Long-duration gilt funds see ~1.4% NAV decline in one day.
- By Feb 2023: Repo at 6.50%. 1-year SBI FD rate at 6.80% (was 5.10% in Jan 2022). Net gain for FD investors: ~170 bps annualised.
- Home loan impact: EBLR-linked ₹50L / 20-year home loan resets from 7.00% (Apr 2022) to 9.25% (Apr 2023) — EMI rises from ₹38,765 to ₹46,027 — a ₹7,262/month increase.
- Equity market: Nifty 50 fell ~15% from April to June 2022 as rate hike fears built in. Recovered through FY2023 as earnings resilience proved hike impact manageable.
See Also
- Reverse Repo Rate
- CPI — Consumer Price Index
- MCLR
- Understanding RBI Monetary Policy
- Reserve Bank of India
Primary Source
RBI MPC Resolution — April 2024 | RBI — Liquidity Adjustment Facility
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