Why markets watch the repo rate

What the repo rate is

The repo rate is the rate at which the Reserve Bank of India lends overnight to banks against government securities. It is the RBI's main policy rate, and the anchor for short-term interest rates across the economy.¹

Who sets it

The Monetary Policy Committee (MPC) sets the repo rate. It has six members: three from the RBI, including the Governor, and three external members appointed by the central government. Since 2016 its job has been to keep CPI inflation at a target set by the government, with a tolerance band around it. Check the RBI's website for the current target and band.

The corridor around it

The repo rate sits inside a corridor:

• Standing Deposit Facility (SDF): the floor. Banks can park surplus funds with the RBI at this rate, without collateral.
• Marginal Standing Facility (MSF): the ceiling. Banks can borrow overnight at this rate in an emergency.

How a change travels

Since October 2019, banks have had to link new floating-rate loans to retail borrowers and small businesses to an external benchmark, and most use the repo rate. So a change can reach those loans quickly. Bond yields, bank deposit rates and the rupee also respond, though not always in the direction or size people expect.

Why markets watch the statement, not just the rate

Markets often anticipate the decision itself. The policy statement, the vote split and the RBI's inflation and growth projections can matter more than the rate, because they hint at what comes next.

What this explainer is not

It explains how policy works. It is not a forecast of rates or markets.

Sources and notes

1. Reserve Bank of India, Monetary Policy. https://www.rbi.org.in ↩