Deep Dive – Repo Rates

There was news earlier this month that the RBI increased the repo rate by 25 basis points to 6.25% and the reverse repo rate to 6% from the earlier 5.75%. This was the first increase in repo rates since January 2014 and the first under the Narendra Modi government.

Some media reports declared that this increase officially marked the turning of the interest rate cycle even though banks have been raising rates on deposits and loans for a few months now. Interest rates started going down from 2015 and the last rate cut was in August 2017.

This decision was taken by the MPC, or Monetary Policy Committee headed by Urjit Patel, governor of the Reserve Bank of India. It received wide coverage across mainstream media, going beyond traditional financial news media. Let’s try to examine what is so important about repo rates that it made such big news.