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Repo rate is the rate at which commercial banks can borrow money from Reserve Bank of India to overcome the shortage of money. By varying the repo rates, the RBI can increase or decrease the supply of money. This rate relates to the loan offered by RBI with securities and only short term borrowings by the commercial banks. Repo rate is used as a main instrument of credit control. When the central bank raises the repo rate, there will be an increase in the cost of borrowing which reduces commercial banks borrowing from the Central bank. Consequently, the flow of money from the commercial banks to the public reduces. Therefore, the supply of money is reduced and bank credit creation is controlled.
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