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We have seen in the past that during a crisis, the RBI adjusts rates, considering various factors such as inflation, financial instability, and more.
In May 2020, when everything slowed down due to the lockdown, the RBI reduced the repo rate from 5.15% to 4.00% to ease borrowing and promote consumption.
Tarun has a home loan of ₹30 lakh at 9% interest. If the rate drops by just 1%, then Tarun will be able to save ₹1,500 every month on his EMI.
This is the power of the repo rate cut. It helps borrowers and stimulates the economy when it is needed most.
Have you ever wondered who gives all the money to the banks? Well, it doesn’t come to them magically. RBI lends money to the banks. In return, it charges interest to the banks.
The repo rate is the interest rate at which it lends money to banks. In short,
In a situation of inflation, the RBI increases the repo rate to decrease spending. In case of financial troubles or slowdowns, it decreases the repo rate to increase liquidity and spending.
Year | Event | Rate Move | Resulting Rate |
1991 | Forex Reserves Crisis | +300 bps | 12.0% |
In 1991, the country's foreign reserves fell below $1 billion. It was barely enough to cover three weeks of imports. The economic condition was so serious that gold had to be mortgaged to foreign banks.
Read More – The Mechanics of Interest Rate Changes
To avoid more damage, the RBI raised rates to handle the outflow of funds and stabilise the rupee.
Month | Change | New Rate |
June | +200 bps | 11.0% |
July | +100 bps |
2008, the global economy collapsed, and banks in many countries were failing. There were growing concerns about a possible liquidity shortage.
RBI started cutting rates aggressively to ensure money flowed into the system.
Date | Rate (%) | Cut (bps) |
October 2008 | 8.00 | -100 |
November 2008 | 7.50 |
-100
February 2009
4.75
-75
This move allowed businesses to borrow at low rates and customers to increase their spending.
Back in 2013, within just a few months, the rupee fell from nearly 54 to about 68 against the dollar. Also, inflation in necessary products was rising.
RBI acted quickly. It increased the repo rate several times to control inflation and restore stability to the currency markets.
Month |
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2008
Global Financial Crisis |
-425 bps |
4.75% |
2013 | Currency Drop and Inflation | +200 bps | 8.00% |
2020 | COVID-19 Lockdowns | -115 bps | 4.00% |
2022 | Inflation After COVID Recovery | +250 bps | 6.50% |
12.0%
-50
December 2008 | 6.50 | -100 |
January 2009 | 5.50 |
*T&C Apply
Rate (%)
Change |
July | 7.25 | +75 bps |
August | 7.50 | +25 bps |
September | 7.75 | +25 bps |
October | 8.00 | +25 bps |
We all have faced the situation of COVID-19. Most of the factories shut down, we stayed in our homes, and demand in the market collapsed.
Also Read - RBI Calls for Lower Lending Rates
RBI took various measures like cutting rates of interest, providing liquidity support, and offering moratoriums. The central bank brought the repo rate down to its lowest level ever.
Date | Repo Rate | Cut (bps) |
March 2020 | 4.40% | -75 |
May 2020 | 4.0% | -40 |
It helped banks in reducing interest rates and allowed people to get cheaper home, auto, and business loans.
Post-COVID, when things started getting back to normal again, inflation started rising. RBI noticed this and started increasing prices to manage inflation.
Month | Rate (%) | Increase (bps) |
May 2022 | 4.40 | +40 |
June 2022 | 4.90 | +50 |
August 2022 | 5.40 | +50 |
December 2022 | 6.25 | +35 |
February 2023 | 6.50 | +25 |
RBI’s quick decision-making has played a huge role in stabilising the economy during difficult times. It used its rate tools to control inflation and support recovery.
From mortgaging gold to record-low rates, the journey of the RBI shows how important quick and balanced decisions are.
Every decision of the RBI related to rate increase or decrease affects borrowers, savers, and the entire economy.
It might seem to you that the repo rate is technical, but its impact is very real. The more we will be able to understand these decisions, the better we will be able to plan our finances.
1. What was the lowest repo rate ever set by RBI?
4.00% in May 2020.
2. Why did RBI increase rates in 2013?
To stop the rupee from falling and control inflation.
3. What was the average repo rate in the 1990s?
Around 10.75%.
4. How do repo rates affect ordinary people?
They influence loan EMIs and deposit interest rates.
