In Illustrations: What Is Repo Rate? How Does A Hike Affect You?

New Delhi:

One of the places that banks in India can borrow some money from is the Reserve Bank of India (RBI). The central bank then charges interest on the money it lends to the banks.

“Can I borrow some money, please?” a bank says. “I’ll repay you tomorrow.”

“Sure. But you have to pay interest on it,” RBI says.

“Deal,” the bank says.

This interest is called the repo rate.

When the RBI raises the repo rate, it affects a large section of people from consumers to businesses because banks will have to repay what they borrowed with more interest to the RBI, and banks pass on some of that burden to its customers.

Today, the RBI raised the repo rate by 25 basis points. One basis point is one-hundredth of a percentage point.

Below is an example of what happens to a typical loan in such a case:

If it cuts the repo rate, the RBI’s intention is to boost growth by making borrowings cheaper. In this case, it is thinking: “Growth needs support and borrowing should become easier.”