An interest rate is the cost of borrowing money or the return earned on savings or investment, expressed as a percentage of the principal amount. It is set by lenders (like banks) and influenced heavily by the central bank of a country.

• If you borrow money: it's the amount you pay back in addition to the loan.

• If you invest or save: it's the return you earn on your money.

What is the Repo Rate?
The Repo Rate (short for Repurchase Rate) is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks for short-term needs.

Why is it called Repo Rate?
In a repo transaction, banks sell government securities to RBI and agree to repurchase them at a later date. It’s like borrowing against collateral. The interest charged in this transaction is the repo rate.

Why is Repo Rate important?

1. Controls Inflation:

   • When inflation is high, RBI increases repo rate, making borrowing costlier and reducing money in circulation.

2. Boosts Growth:

   • When economy slows down, RBI lowers repo rate, making loans cheaper to encourage spending and investment.

3. Impacts Loan Rates:

   • Banks often adjust their home, car, or business loan interest rates based on repo rate changes.

Example:
If the repo rate is 6.5%, banks borrow from RBI at this rate. If RBI increases it to 6.75%, loans may become costlier, reducing demand and controlling inflation.