03 August,2026 11:29 AM IST | Mumbai | mid-day online correspondent
Reserve Bank of India. File pic.
The three-day meeting of the Reserve Bank of India (RBI) started on Monday with the Monetary Policy Committee slated to announce its decision on the benchmark repo rate on Wednesday, August 5. But what is repo rate and why is it important?
Repo rate is the short-term interest rate at which commercial banks borrow money from RBI to meet their short-term requirements. As banks mostly borrow the money for overnight or up to a couple of weeks, it is also known as overnight lending rate. Banks keep government bonds or securities as collateral with RBI to borrow this short-term loan.
To meet the regulatory compliance of statutory liquidity ratio (SLR) or cash reserve ratio (CRR) banks may borrow money from RBI. SLR is the minimum percentage of deposits that banks must maintain internally in safe liquid assets such as cash, gold, and government bonds.
The SLR at present is 18 per cent of a bank's net demand and time liabilities or the total amount it owes its customers (current account, savings account, fixed, and recurring deposits) excluding the deposits in other banks. The SLR acts as a safety net for a bank in case of any crisis.
CRR is the minimum percentage of the total deposits that banks must hold as cash and park with RBI. The current CRR at present is 3 per cent bank's net demand and time liabilities and similar to SLR, acts as a buffer for public money kept in banks.
Apart from the regulatory requirements, banks may borrow money from RBI if there are many cash withdrawals from customers compared to the amount deposited with the bank or if there is a sudden demand for high loans.
When RBI cuts the repo rate, it makes the borrowing for banks cheaper and they consequently, lower their lending rate to customers. This boosts economic activity as businesses can tap into these resources to fund their projects or for expansion. Conversely, when RBI increases its rates, it makes borrowing for banks expensive and banks also increase their lending rates to customers. This reduces the amount readily available in the market and in the short-term could impact the economic growth. But the apex bank does this to contain the inflation.
The Central Bank changes the rate in basis points, which is one-hundredth of a percentage point or 1/100th of 1 per cent. The increase or decrease in repo rate also affects the deposit rates. So when the rates rise, so do the rate of interest offered by banks on fixed deposits and when the rates are cut, the interest rate offered on fixed deposits also reduce.
Economists expect the Reserve Bank to hold on the rates (keep the repo rate unchanged) on Wednesday. In June, the Reserve Bank had kept its key policy rate unchanged at 5.25 per cent and adopted a cautious wait-and-watch stance amid the West Asia conflict.
The Reserve Bank of India had raised the retail inflation estimate for 2026-27 to 5.1 per cent from its earlier estimate of 4.6 per cent, due to the rising input costs driven by soaring crude oil prices amid the US-Iran conflict. The gross domestic product (GDP) for FY27 was also revised to 6.6 per cent from the 6.9 per cent estimated in April.
