Repo Rate and Monetary Policy Transmission Mechanism
The repo rate (repurchase rate) is the rate at which the RBI lends short-term funds to commercial banks against government securities under repurchase agreements. It is the primary policy rate signal in India's monetary framework. When RBI raises the repo rate, borrowing becomes costlier for banks, they transmit this by raising lending rates, which dampens credit growth, demand, and thus inflation. A rate cut has the reverse effect.
India operates under a flexible inflation targeting (FIT) framework since 2016, where the repo rate is the instrument for achieving the inflation target. The key policy rates in the framework include: - Repo Rate: Rate at which RBI lends to banks overnight (primary signal). - Standing Deposit Facility (SDF) Rate: The floor rate at which banks park excess liquidity with RBI (replaced the reverse repo rate as the lower bound). - Marginal Standing Facility (MSF) Rate: The ceiling rate at which banks borrow from RBI against approved securities (above repo).
- Current repo rate: 5.25% (after 25 bps cut in February 2026; prior rate was 5.50%).
- The SDF rate is typically repo rate minus 25 bps; MSF rate is repo rate plus 25 bps, forming the interest rate corridor.
- CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are separate tools: CRR is the proportion of deposits banks must maintain as cash with RBI (currently 4%); SLR is the proportion maintained in government securities (currently 18%).
- Monetary policy transmission in India is partially impaired by factors such as banks' fixed-rate deposit portfolios, administered interest rates, and the dominance of the MCLR-linked lending rate system.
● Tracked since April 01, 2026 · last seen August 06, 2026 · updates as the daily brief publishes