Repo rate is the repurchasing option rate at which commercial banks borrow money, overnight, from the central bank, ie. Reserve Bank of India or RBI. RBI also uses the repo rate to regulate inflation.
The current Repo rate is 5.15 percent.
When commercial banks face a shortage of funds, they take a one-day loan from RBI by selling RBI-approved securities such as treasury bills(in excess of their statutory liquidity ratio limit).
To repay the banks buy back the securities deposited at a specified price known as the repurchasing option or repo. The percentage difference between the selling price and repo price is the interest rate charged by RBI and is known as the repo rate.
If RBI increases the repo rate, it makes it difficult for banks to borrow from it, reducing the cash flows in the economy, arresting inflation.
Decreasing the repo rate, consequently increases cash flows in the economy as credit becomes cheaper and spurs spending in the economy. It is a way of addressing a slowdown.
RBI holds quarterly meetings to declare repo rate for the quarter. The last meeting in October, the repo rate was cut 25 basis points to 5.15 percent.