What is Repo Rate?
The interest rate at which a central bank lends to commercial banks — the anchor for loan rates.
The repo (or policy) rate is set by the central bank. When it rises, banks' borrowing costs rise and loan rates follow; when it falls, loans get cheaper. Floating-rate loans move with it.
Example
If the policy repo rate is 5.25%, floating home loans sit a few points above it.
What the repo rate is
The repo rate is the interest rate at which a country's central bank lends short-term funds to commercial banks. It is the central bank's main policy lever: raising it makes borrowing more expensive to cool inflation, while cutting it makes credit cheaper to support growth.
How a repo change reaches you
The repo rate anchors the whole rate structure. When it moves, banks re-price loans and deposits: floating-rate and benchmark-linked loans re-set higher or lower, and savings and fixed-deposit rates follow. That is why a central-bank decision on the repo rate directly affects your mortgage payment and your deposit returns.
A second example: a rate cut
Say a floating-rate mortgage is priced at the repo rate plus a 2 percentage-point spread. If the repo rate is cut from 6.5% to 6.0%, the loan's rate falls from 8.5% to 8.0% at the next reset — on an outstanding balance of 5,000,000 over 15 years remaining, that half-point drop lowers the EMI by roughly 1,400–1,500 a month, freeing up cash flow without the borrower doing anything. The reverse happens on a hike: the same loan's EMI rises by a similar amount when the repo rate goes back up.
A common mistake: repo rate ≠ your loan rate
Borrowers sometimes expect their mortgage rate to equal the repo rate itself, then feel misled when it's several points higher. The repo rate is a wholesale, interbank rate; retail borrowers are charged the repo rate plus a spread that covers the bank's own cost of funds, operating costs, profit margin and the individual borrower's credit risk. A repo-rate cut lowers that base, but the spread on top of it is set by the bank, not the central bank, and can itself change over time.
How the mechanism differs by country
Central banks don't all use the same lever or name. The Bank of England sets "Bank Rate," defined as the interest it pays commercial banks and building societies on money they hold with it, and changes to it feed through to mortgage and savings rates across the UK. The US Federal Reserve instead targets the federal funds rate and uses standing repo and reverse repo operations — buying or selling securities with an agreement to reverse the trade later — run by the New York Fed's trading desk, to keep short-term market rates inside that target range. "Repo rate" as the everyday name for the main policy rate is most common in South Asian markets. Whatever it's called, a floating-rate loan's EMI resets when it moves, and the change flows through to bond and money-market mutual funds too, since their yields track the same short-term rates. This is also why financial news treats a central bank's rate-setting meeting as a major event for borrowers and savers alike: the decision reached in that one meeting resets the base cost of credit across an entire economy at once, long before any individual bank changes its own posted rates, which is why even people with no floating-rate loan still feel the effects through savings rates, mortgage affordability across the housing market, and the exchange rate.
FAQ
Is the repo rate the same as my loan's interest rate?
No. The repo rate is the wholesale rate a central bank charges banks; your loan rate is the repo rate plus a spread the bank adds for its own funding costs, profit margin and your credit risk. Two borrowers at the same bank, under the same repo rate, can have different loan rates because their spreads differ.
Why do some countries call it "Bank Rate" instead of repo rate?
Central banks use different mechanisms and names for their main policy lever. The Bank of England's headline rate is called "Bank Rate," defined as the rate it pays on money commercial banks hold with it. The US Federal Reserve targets the federal funds rate and separately runs standing repo and reverse repo operations to keep short-term market rates within that target range. "Repo rate" is the more common everyday term in South Asian and several other markets, but the underlying job — anchoring the cost of short-term bank funding — is the same.
Sources
- The interest rate (Bank Rate) — Bank of England (accessed 26 September 2026)
- Repo and Reverse Repo Agreements — Federal Reserve Bank of New York (accessed 26 September 2026)