The Repo Rate refers to the interest rate at which the Reserve Bank of India (RBI) provides loans to commercial banks

Why is this happening now?

On April 9, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) made the decision to lower the repo rate by 25 basis points to 6%. Additionally, the committee shifted the monetary policy stance from "neutral" to "accommodative," indicating the possibility of further repo rate reductions in the near future.

What is the repo rate?

Individuals approach commercial banks to either deposit their savings or obtain loans. Banks provide interest on deposits while charging a higher interest rate on loans, which is how they generate profit.

A significant factor influencing these rates—though not the sole determinant—is the interest rates that commercial banks incur when borrowing from or depositing with the RBI. The rate at which the RBI lends to commercial banks is referred to as the repo rate, while the rate the central bank offers to banks for their excess funds is known as the reverse repo rate.

At present, the repo rate stands at 6%, while the reverse repo rate is at 3.35%.

Why is the repo rate important?

The RBI utilizes these two rates to influence all other interest rates within the banking sector, which subsequently impacts the wider economy.

For example, when the RBI aims to stimulate economic activity, it lowers the repo rate. This reduction allows commercial banks to decrease the interest rates they charge on loans and the rates they offer on deposits. Consequently, this encourages individuals to spend more, as the returns on their savings diminish, and motivates businesses to seek new loans for investments, as borrowing costs become more affordable.

Conversely, when the Reserve Bank of India (RBI) aims to curb inflation, it raises the repo rate. As a result, banks incur higher interest costs when borrowing from the RBI, leading them to impose increased interest rates on their own borrowers. This, on a broader scale, discourages individuals from taking out loans and spending, which subsequently decreases the money supply in the market, thereby counteracting inflation.

This is why the repo and reverse repo rates are commonly referred to as the "benchmark" interest rates within the economy.

What prompted the RBI to lower the repo rate?

The central bank's action comes in response to growing global economic uncertainty, particularly due to the extensive reciprocal tariffs introduced by the Trump administration in the United States.

"The global economic landscape is rapidly evolving. The fiscal year 2026 has commenced with concerns, and some anticipated global trade tensions are materializing," stated RBI Governor Sanjay Malhotra on Wednesday. He emphasized that the central bank is currently "more concerned" about a sluggish economy than about inflation. The inflation rate for January-February is averaging 3.9%, which is below the RBI's quarterly forecast for January-March 2025. The RBI has estimated consumer price-based inflation (CPI) to be 4.8% for the fourth quarter of fiscal year 2025.