Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.
If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
How this affects us: If the bank is paying a higher rate of interest to borrow money, we are the one who will bear the cost — we will pay a higher rate of interest when we borrow money from them. This is how banks ensure that they continue to make a profit.
For example, let’s say you need money for some reason and you apply for a loan. The bank may have already exhausted all its available money by lending to other borrowers and does not have enough money to lend to you. This does not mean it will refuse your loan request.
The bank will go to the RBI and ask for money. The RBI lends this money to the bank at a fixed rate of interest (the repo rate fixed during the credit policy; the credit policy is announced every quarter). This tool helps the RBI increase the amount of money flowing into an economy (that is, it brings more money, as and when needed, into the banking system).
As of now, the Repo Rate is 8.5%.