The repo rate, short for repurchase rate, is the rate at which the central bank of a country (such as the Federal Reserve in the United States or the Reserve Bank of India) lends money to commercial banks against the collateral of government securities. It is a key tool used by central banks to control monetary policy, particularly to regulate inflation, economic growth, and liquidity in the economy.

Here’s how it works: When a central bank wants to tighten monetary conditions (reduce inflation or control credit growth), it raises the repo rate. This makes borrowing more expensive for commercial banks, which in turn affects the interest rates they charge customers for loans. Conversely, if the central bank wants to stimulate the economy, it lowers the repo rate, making borrowing cheaper and encouraging more spending and investment.

In summary, the repo rate policy is a crucial monetary policy tool used by central banks to manage economic conditions by influencing interest rates in the economy.