Reserve Bank of India has today announced a cut in the REPO rate. It has slashed the REPO rate by 25 points and decided the rate at 6.5%. This is the lowest REPO rate since January 2011. But wait! What’s a REPO rate and what has it to do with the economy?

- A REPO rate is the interest charged by the RBI on the amount it lends to the banks.

- In case of inflation, RBI would increase the REPO rate to discourage the banks for lending loans from RBI. Thus the cash flow in the economy would drop down.

- If the inflation rate is under control, RBI might decrease the REPO rate to provide more inflow of funds into the economy.

- Presently RBI has decreased the REPO rate for two reasons. Firstly, the inflation rate at present is under control and secondly RBI feels that the present government is depending more on investments rather than borrowing.- It’s being widely expected that RBI might slash down a further .25% in REPO rate by this June. This would certainly make banks happy.

- But would the banks in turn decrease the rates to their customers is a matter of decision that lies with banks.