What is the repo rate, and how does the RBI decide it?

When the Reserve Bank of India announces a policy decision, the headline number is almost always the repo rate. It is the single most important lever the central bank uses to manage inflation and growth.

What the repo rate is

"Repo" is short for repurchase agreement. Banks often need short-term money. They can borrow it from the RBI by selling government securities and agreeing to buy them back later at a fixed price. The interest the RBI charges on this borrowing is the repo rate.

When the repo rate rises, banks pay more for funds and tend to raise the rates they charge borrowers. When it falls, borrowing becomes cheaper across the system.

Standing Deposit Facility (SDF) rate: what the RBI pays banks that park surplus funds with it. It forms the floor of the policy corridor.
Marginal Standing Facility (MSF) rate: the penal rate at which banks can borrow overnight in an emergency. It forms the ceiling.
Cash Reserve Ratio (CRR): the share of deposits banks must keep with the RBI. It is a separate tool that affects how much money banks can lend.

Who decides: the Monetary Policy Committee

Since 2016, the repo rate has been set by a six-member Monetary Policy Committee (MPC), created under an amendment to the RBI Act. Three members are from the RBI, including the Governor, who chairs it. Three are external members appointed by the central government. Each member has one vote, and the Governor has a casting vote in a tie.

The law requires the committee to meet at least four times a year. In practice, it has met six times a year. The minutes of each meeting, including how each member voted, are published about two weeks later.

The target: inflation

India follows a flexible inflation-targeting framework. The government, in consultation with the RBI, sets a target for consumer price inflation every five years. The target has been 4%, with a tolerance band of 2 percentage points on either side. If inflation stays outside the band for three consecutive quarters, the RBI must write to the government explaining why and what it will do.

"Flexible" means the MPC also keeps an eye on growth. When inflation is high, it may raise rates to cool demand. When inflation is comfortable and growth is weak, it may cut rates.

How a change reaches your EMI

Most new floating-rate home and retail loans in India are linked to an external benchmark, usually the repo rate itself. Banks add a spread to the benchmark and must reset the rate at least once every three months. So a repo change tends to show up in these loans within a quarter.

Older loans linked to a bank's internal benchmark, such as the MCLR, adjust more slowly. Deposit rates usually follow the policy direction too, but with a lag.

What a quarter-point cut means in rupees

Rate changes are usually announced in "basis points": 100 basis points equal one percentage point, so a 25 basis-point cut is 0.25%.

Take a ₹30 lakh home loan over 20 years. By our calculation, at 8.5% a year the monthly EMI is about ₹26,035. If the rate falls to 8.25%, the EMI drops to about ₹25,562, a saving of roughly ₹473 a month, or about ₹1.13 lakh over the full term if the new rate held throughout.

In practice, many banks keep the EMI the same after a cut and shorten the loan's tenure instead. Ask your lender which option it has applied, since you can often choose.

Why your deposit rate falls too

Banks pay depositors with the money they earn from borrowers. When lending rates come down, banks usually trim fixed deposit rates as well, but with a lag. Existing fixed deposits keep their rate until they mature. For savers, especially retirees who live on interest income, a cutting cycle means lower returns on new deposits.

Liquidity: the other half of the story

The repo rate sets the price of money, but the RBI also manages how much money is in the banking system. It uses tools such as variable rate repo and reverse repo auctions, buying and selling government bonds, and changes to the cash reserve ratio. When the system has too little cash, market rates can stay high even after a repo cut, so transmission to borrowers is slower. Watch the RBI's liquidity announcements alongside the headline rate.

Where to find the decision

The RBI publishes the policy statement, the Governor's statement and, about two weeks later, the MPC minutes on its website. Those are the primary sources; news summaries are based on them.

Reading a policy announcement

Look at the stance (for example "neutral" or "accommodative"). It signals where rates may go next.
Check the RBI's projections for inflation and GDP growth.
Read the vote split. A divided committee suggests the next move is less certain.