RBI Repo Rate History from 2000 to 2023

In this post, I am sharing RBI Repo Rate History from 2000 to 2023 (the latest change of 10th August 2023). Whenever you are watching business news channels you might have come across the word called as Repo Rate or Reverse Repo Rate.

Note – On 10th August 2023, the Repo rate was unchanged and RBI retained the previous rate of 6.50%.

Let us first try to understand what is Repo Rate.

As you may be aware RBI is a regulator of the Indian banking system. The two most important functions of RBI are – to control the supply of money in the economy and to control the cost of credit (lending rate).

RBI always monitor these two functions as they directly impact the inflation and growth of the nation. Repo and Reverse Repo rates are the two tools that RBI uses to curtail inflation and thereby support the economic growth of the country.

What is Repo Rate?

When we need the money then usually we approach the bank. Banks usually lend us by charging certain interest. This is called the cost of lending.

Same way when banks need money, they approach RBI. The rate at which they borrow money from RBI is called as Repo Rate. For such borrowing, banks have to pledge certain government securities. For example, if the repo rate is 5%, and the bank takes a loan of Rs.1,000 from RBI, then the bank will pay interest of Rs.50 to RBI.

The long form of the repo rate is “Repurchase Rate”. Usually, these loans are for overnight (1 day).

A higher repo rate means a higher cost of borrowing for the short-term needs of the banks. Based on this, banks usually charge the rate of interest for us.

If banks are unable to repay, then the RBI can sell these pledged Government Securities in the open market and recover the amount.

What is Reverse Repo Rate?

When you have the money you usually deposit it with the bank. In return, the bank will give you some interest on such FDs, right? In the same way, whenever banks have surplus money, they deposit the extra money with the RBI for which they earn interest at a rate known as the Reverse Repo Rate. For this deposit, the RBI provides collateral in the form of Government Securities.

Long form of Reverse Repo Rate is “Reverse Repurchase Option”. This is also of a one-day tenure.

So we can explain the same using the below image for your better understanding.

Why will RBI change Repo and Reverse Repo Rates?

Whenever the RBI increases the repo rate, banks have to pay more interest to borrow the money. In return, banks will charge a higher interest rate to their customers. As borrowing costs for us increased means we hesitate to take the loan. Because of this, people spend less.

As there is less demand for goods and services, the price of the goods and services will fall. Thereby inflation rate will decrease.

So in simple terms, to control inflation, RBI will increase the repo and reverse repo rates.

However, if inflation is low, then it means that there is less demand for goods and services. To promote spending and increase demand, RBI will decrease the repo and reverse repo rates. As interest rates decrease for the banks, banks will start to offer us loans at a lower rate. Thereby people start borrowing the money and start to spend.

Hence, as and when there is a need to decrease or increase inflation, RBI will change the repo or reverse repo rates.