The Reserve Bank of India has many tools to control and maintain liquidity in the market and to put the economy in right track. It exercises these tools whenever necessary and one among them is REPO rate.
The REPO (or) Repurchase rate is the interest rate charged by RBI to banks when they approach it for short term loans. If the REPO rate is more than banks borrow funds from RBI at high cost. Banks in turn pass on this cost to its customers to recover the costs, making loans costlier to the common man.
The adjustments in the REPO rate also effects the liquidity in the economy.If the REPO rate is high, banks don’t prefer to borrow money from RBI and also common man don’t prefer to borrow money from banks. Common man in turn saves money at high interest rates. This reduces liquidity in the economy making money access to people decrease. So, if RBI wants to suck the liquidity out the market they will increase the REPO rate and vice-versa.
The RBI revises CRR and repo rates in their Quarterly and mid-quarter policy reviews to maintain a balance between growth and inflation.
The current repo rate in India is 6.50 %.