RBI’s Repo Rate Tool and Its Impact on Inflation Management

The repo rate is the rate at which the RBI lends short‑term funds to commercial banks against government securities; a change directly affects borrowing costs across the economy.

When inflation pressures rise, the RBI may hike the repo rate to curb demand, leading to higher loan rates and reduced credit growth; conversely, a cut aims to spur investment and consumption.

The transmission mechanism links the repo rate to deposit rates, corporate bonds, housing loans and ultimately to price levels, making it a core topic in banking and economics sections of competitive exams.