Repo Rate

Image source: Financial Express

• Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. 
• The central bank in India i.e. the Reserve Bank of India (RBI) uses repo rate to regulate liquidity in the economy. In banking, repo rate is related to the ‘repurchase option’ or ‘repurchase agreement’.
• When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable. 
• The central bank provides these short terms loans against securities such as treasury bills or government bonds. 
• This monetary policy is used by the central bank to control inflation or increase the liquidity of banks. 
• The government increases the repo rate when they need to control prices and restrict borrowings. 
• On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.
• An increase in repo rate means commercial banks have to pay more interest for the money lent to them and therefore, a change in repo rate eventually affects public borrowings such as home loan, EMIs, etc.