RBI Cuts Repo Rate by 25 BPS to 6.25 Percent

Summary 

RBI Cuts Repo Rate by 25 BPS to 6.25 Percent and Reverse Repo Rate are two of the major monetary policy tools used by the Reserve Bank of India (RBI) to regulate the economy. Repo Rate is the rate at which banks borrow money from the RBI by pledging securities. The Reverse Repo Rate is the rate at which banks deposit their surplus funds with the RBI. These rates directly influence lending, borrowing, inflation, and economic growth.

Whenever the Repo Rate increases, borrowing is costly, hence discouraging loans and reducing the money supply, thereby helping to keep inflation under check. Conversely, when the Repo Rate is lowered, loans are cheaper, making businesses and people borrow more and boosting economic activities. Similarly, the Reverse Repo Rate affects the money that the banks keep in the RBI.

The RBI has been changing these rates in the last few years keeping in mind the economic condition. In the wake of the COVID-19 pandemic, the Repo Rate was lowered to encourage growth. As inflation rose thereafter, RBI increased the Repo Rate to curb inflation. The RBI Cuts Repo Rate by 25 BPS to 6.25 Percent for the first time in five years to boost growth. Meanwhile, the Reverse Repo Rate remained at 3.35% in February 2025.

Introduction

Working on various economic policies, the financial system of any country works. Among the most prime factors that help frame the economy are interest rates. Among these, the two most important interest rates controlled by the Reserve Bank of India (RBI) are Repo Rate and Reverse Repo Rate. Both these rates directly influence the availability of money in the market and further affect inflation, the cost of borrowing for businesses and individuals, and the economy’s overall growth.

Simply put, the Repo Rate is the rate at which commercial banks borrow money from the RBI when they are short of funds. Reverse Repo Rate is the rate at which excess money from the banks is deposited with the RBI for earning interest. These two rates are the most important tools that the central bank uses to regulate liquidity in the banking system and control inflation.

When the Repo Rate increases, it becomes costly for banks to borrow money from the RBI, hence increasing the rate of loans and reducing the money circulation in the economy. It helps in curbing inflation but slows down economic growth. In contrast, if the Repo Rate decreases, the banks can borrow at a lesser cost, thus increasing the money in the market, which would encourage spending and investment but can also lead to inflation if not controlled properly.

In this article, we are going to look at the differences in detail between Repo Rate and Reverse Repo Rate, how they affect the people and the business, and how they ultimately impact the economy. Let’s take a deeper dive into their importance and how they shape financial decisions in India.

What is the Repo Rate? (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Repo Rate is the rate at which RBI lends short-term loans to commercial banks. In case the banks require funds urgently, they borrow from RBI by pledging their government bonds or securities. The rate of interest charged on this loan is known as the Repo Rate.

Simply put, if a bank raises money from RBI, it pays interest on that money with a fixed rate and that is called the repo rate. When RBI increases the rate, then repaying such loans to customers becomes expensive for banks, thus they boost the rate of interest on disbursed loans. Such affects directly services like home loans, car loans, and business loans.

What is the Reverse Repo Rate?

The Reverse Repo Rate is the interest rate at which the Reserve Bank of India (RBI) borrows funds from commercial banks for a very short period. When banks are holding surplus money that they are not willing to lend to firms or individuals, they deposit it with the RBI to earn some interest. It is the reverse repo rate on which RBI pays interest to the banks for depositing such balances.

In simple words, the Reverse Repo Rate helps RBI curtail excess money in the system. When it is high, banks do not lend but are keen to hold their surplus balances with the Reserve Bank of India, thus taming the demand for money by the market which causes inflation and hence reduces supply.

What is the Importance of Repo Rate and Reverse Repo Rate? (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Let’s understand what these are in simple words:

• If the level of inflation, or price rise, is high, RBI increases the Repo Rate. This makes borrowing costlier for the banks and thus raises loan interest rates for businessmen and people. As a consequence, people lend and spend less, which helps in reining in inflation.

• When the economy requires a boost, RBI reduces the Repo Rate so that loans are cheaper. Businesses and people borrow more money, thus boosting spending and investment, thereby facilitating economic growth.

• Reverse Repo Rate is used to curb excess money in the market. When RBI raises the Reverse Repo Rate, the banks will like to deposit the excess money in RBI rather than lending, and thus, reduce the flow of money.

• The money flow in the market will increase because RBI will reduce its Reverse Repo Rate as the banks will lend more money instead of depositing it at RBI.

• The Repo Rate works inversely of the home, car, and other business loan interest rates that follow an upward momentum with increased Repo Rate.

• When the Repo Rate is low, then loan interest rates reduce, meaning EMIs are cheaper, and people will take more loans.

• RBI adjusts these rates accordingly so that neither inflationary pressure nor economic slowdown takes place. Thus, RBI balances the Repo Rate and the Reverse Repo Rate to have a stable economy and financial system.

• In a nutshell, the rates affect your savings, loans, EMIs, and prices of goods and services. Therefore, Repo Rate and Reverse Repo Rate are extremely important for every individual and business.

What is the Difference Between the Repo Rate and the Reverse Repo Rate? (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Let’s understand the key differences in simple words:

Repo Rate	Reverse Repo Rate
The rate at which RBI lends money to banks when they need funds.	The rate at which the RBI borrows money from banks when banks have spare funds.
If the Repo Rate declines, then the loans become cheap (lower EMIs).It helps the banks when they need money.	Helps the RBI absorb excess money from banks as and when required to reduce inflation.
A high Repo Rate reduces the flow of money and, therefore, controls inflation.	A higher Reverse Repo Rate encourages the banks to keep more money with RBI, reducing money in the market. A lower rate encourages lending thereby increasing the flow of money.
If the Repo Rate increases, the loans become expensive (higher EMIs).	If the Reverse Repo Rate increases, then banks lend less, and interest rates may rise. If the Reverse Repo Rate decreases, then banks lend more, and interest rates may fall.
If the Repo Rate declines, then the loans become cheap (lower EMIs). It helps the banks when they need money.	It helps RBI to manage excess cash in the system.

What is the Impact of Repo Rate and Reverse Repo Rate on the Economy? (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Let’s understand the impact of inflation in simple words:

• When the rate of inflation is high, RBI increases the Repo Rate. This makes loans costlier; borrowing and spending decrease, which controls the rate of inflation.

• When the rate of inflation is low, RBI decreases the Repo Rate, making loans cheaper. There is an increase in borrowing and spending, which boosts economic activity.

• A lower Repo Rate encourages businesses to take more loans, invest in new projects, and create more jobs, which leads to economic growth.

• A higher Repo Rate will reduce borrowing which can slow down business expansion and job creation.

• If the Repo Rate goes up, banks increase the interest rate on loans, so even home loans, car loans, and personal loans become expensive. 

• If the Repo Rate goes down, banks reduce the interest rates, and loans become cheaper and lower EMIs.

• Increased Repo Rate allows banks to earn higher interest by depositing with the RBI. That in turn pushes them to increase their FD rates, helping savers.

• Decreased Reverse Repo Rate forces the bank to give out more and save less in the RBI which might reduce the FD rates.

• Increased RepoRatese and Reverse RepRateste will reduce money to curb inflation.

• A lower Repo Rate and a lower Reverse Repo Rate increase money flow, enhancing spending and investment.

What is the Current Repo Rate and Reverse Repo Rate? (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Till February 7, 2025, the Reserve Bank of India had cut down the Repo Rate by 0.25 percentage points which was down at 6.25%.

It is the first cut in the Repo Rate by the RBI in nearly five years, as it aims to stimulate economic growth. The Reverse Repo Rate remains untouched at 3.35%.

What is the Role of RBI in Adjusting These Rates? (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Let’s understand RBI’s role in simple words:

• When inflation (price rise) is high, RBI increases the Repo Rate to make loans expensive. This reduces borrowing and spending, helping to control inflation.

• When inflation is low, RBI reduces the Repo Rate to make loans cheaper. This encourages businesses and people to borrow and spend more, boosting the economy.

• In case of too much money in the market, the inflation goes up. Here RBI increases the Reverse Repo Rate that makes the banks deposit the surplus money with RBI, reducing liquidity.

• In case of less money in the market, it causes a slowdown of the economy. In such a scenario, RBI reduces the Reverse Repo Rate and asks the banks to lend more rather than keeping money with RBI.

• RBI fine-tunes these rates to ensure that inflation is balanced with growth in the economy. Sudden changes can be detrimental to businesses, consumers, and financial markets.

• If RBI hikes the Repo Rate, the banks hike loan interest rates and EMIs become costlier.

• If RBI lowers the Repo Rate, the banks reduce interest rates and loans become cheaper.

• Likewise, savings and fixed deposit (FD) interest rates change with the Reverse Repo Rate.

How RBI Uses These Rates to Control Inflation?

Let’s understand how this works in simple words:

• Effect on Banks: RBI charges more interest to lend it money, and thus banks charge higher interest rates for loans.

• Effect on People: Loans-Home, car, and personal loans become costly. EMIs go up. The propensity to borrow reduces, hence the propensity to spend also comes down.

• Effect on Businesses: Businesses also lend less. So, investments fall, and the rate of price increases slows down.

• Effect on Money Supply: Since fewer people take loans, there is less money in the market, helping control inflation.

• Effect on Banks: Banks get loans from RBI at a lower rate, so they reduce loan interest rates.

• Effect on People: Loans become cheaper, and EMIs are reduced. This encourages more borrowing and spending.

• Effect on Businesses: Businesses take more loans to invest in expansion, creating jobs and boosting economic activity.

• Effect on Money Supply: More money flows into the market because more people and businesses take loans. This will stimulate growth.

How RBI Uses These Rates in Monetary Policy?

Let’s understand this in simple words:

What is Monetary Policy?

Monetary Policy refers to the RBI’s strategy to control the flow of money in the economy. The main goal is to keep inflation under control, ensure economic growth, and maintain financial stability.

How RBI Uses These Rates in Monetary Policy:

• When inflation is high, that is when prices are going up too fast, RBI raises the Repo Rate. This increases the cost of loans, decreases spending, and brings down inflation.

• RBI also raises the Reverse Repo Rate, which induces banks to keep money with RBI rather than lending it out. This reduces the money supply in the market.

• When the economy slows down and spends too low, RBI decreases the Repo Rate. This renders loans cheaper and promotes borrowing by businesses and individuals. 

• The RBI further decreases the Reverse Repo Rate so that the banks lend more to the economy instead of holding onto money with RBI. This increases the amount of money in circulation and stimulates economic activity.

• If there is excess money in the market, then inflation will rise. The RBI increases Repo and Reverse Repo Rate to stop money flow in the market.

• If money is scarce in the market, economic growth slows. The RBI lowers these rates so that liquidity flows into the economy and spending will be increased.

Repo Rate & Reverse Repo Rate Trends in India (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

Here is an in-simplified representation of their trend during the last two to three years:

Repo Rate (RBI Cuts Repo Rate by 25 BPS to 6.25 Percent)

• 2019-2020: The RBI cut the Repo Rate several times to boost economic growth and brought it down to about 4.0% by May 2020.

• 2020-2024: Due to inflation and other economic variables, RBI increased the Repo Rate step-by-step to 6.50% as of October 2024.

• February 2025: In its board meeting on 7 February 2025, the RBI reduced the Repo Rate by 0.25 percentage points reducing it to 6.25%. The move was the first in almost five years aimed at supporting the economy during its slump.

Reverse Repo Rate

• 2019-2020: The Reserve Repo Rate too was cut to facilitate banks in lending more than keeping funds at RBI.

• 2020-2024: The rate was kept nearly steady with small revisions and stood at 3.35% till December 2024.

• February 2025: So far, RBI Cuts Repo Rate by 25 BPS to 6.25 Percent and the latest updates do not change the Reverse Repo Rate which is at 3.35%.

Conclusion 

The RBI Cuts Repo Rate by 25 BPS to 6.25 Percent and Reverse Repo Rate are amongst the most widely used instruments through which the RBI manages the Indian economy. Borrowing, lending, inflationary pressure, and the overall development of the economy are all sensitive to these two rates. In simple words, the Repo Rate is the interest rate at which banks borrow funds from the RBI, and Reverse Repo Rate is the rate of interest at which banks deposit excess funds with the RBI. This helps the RBI adjust these rates, which can encourage or discourage lending and spending based on the situation of the economy.

Over the years, India has seen various changes in these rates. The RBI increases the Repo Rate when the economy experiences high inflation so that borrowing becomes expensive and less money flows into the market, thus controlling rising prices. Now, when the rate of economic growth slows down, and demand in the economy lowers, the RBI reduces the Repo Rate to invite borrowing, investing, and more spending. And similarly, there is a revision in the Reverse Repo Rate; it either sucks out excess liquidity or lets the banks lend easily.

These influence the economy, which can then be seen manifesting in each sector of it. A high Repo Rate leads to a higher loan interest rate. As a result, home loans, car loans, and personal loans are expensive. This reduces borrowing as well as overall demand. On the other hand, low Repo Rates lower the cost of borrowing; businesses invest more, and people increase expenditure, all boosting economic activity. The Reverse Repo Rate, however, directly determines how much banks lend.

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