Repo rate (also known as Repurchase Rate) is the rate at which the Central Bank lends money to the banks on short term basis. Increase in Repo rate leads to higher short term borrowing rate for the banks which again leads to higher prime lending rate, the rate at which banks lends money to other customers or corporates. Increase in Repo rate mainly leads to higher interest rate on home loan, car loans, and corporate borrowings.
The main effect is reduced demand of home, cars by the normal citizen and corporate loans by the Companies used for business expansion. It impacts the revenue and profit margin of the auto sector and housing sector companies aversely and makes the business and industrial expansion more expensive, thus reduce the industrial activity. That’s why increase in repo rate is very effective to control inflation. But at the same time, it hurts the economic and industrial growth severely. Central Bank’s job is to maintain the repo rate properly so that it won’t affect the economic growth activity.