• Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
• It is used by monetary authorities to control inflation.
• In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.
• This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

How does the repo dynamics work?

• When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable.
• The central bank provides these short terms loans against securities such as treasury bills or government bonds.
• This monetary policy is used by the central bank to control inflation or increase the liquidity of banks.
• The government increases the repo rate when they need to control prices and restrict borrowings.
• An increase in repo rate means commercial banks have to pay more interest for the money lent to them and therefore, a change in repo rate eventually affects public borrowings such as home loan, EMIs, etc.
• From interest charged by commercial banks on loans to the returns from deposits, various financial and investment instruments are indirectly dependent on the repo rate.

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