What is Repo Rate and How Does it Impact Business Loan Interest Rates?

The Repo rate today stands at 6%, but the latest SBI research suggests that the Reserve Bank of India (RBI) will likely cut the Repo rate by 50 bps in June and August. Whether you have taken a loan or not, you have definitely heard of Repo rates either in news articles or people talking about it around you. A change in Repo rate has a direct impact on the loan, but the question is, ‘What is Repo rate?’

Loan interest rates often fluctuate but it doesn’t rise or fall due to market factors. Instead, the RBI decides the Repo rate. A rise in the Repo rate leads to higher interest rates, whereas a decline results in lower interest rates. If you’re a small business owner or an MSME, understanding the Repo rate meaning and how it impacts your business loan helps you plan your finances better.

What is Repo Rate?

The Repo Rate full form stands for Repurchase Agreement or Repurchasing Option. It is the rate of interest that the Reserve Bank of India (RBI) charges from commercial banks on loans. However, its function goes beyond just deciding the interest rates in the country. It helps you decide whether your next loan will be affordable or costly.

When banks face a financial crisis or liquidity crisis, they borrow money from the RBI. And the interest rate that they take the loan at from RBI is known as the Repo rate. It is not only a lending metric but an important tool that RBI uses to manage inflation and liquidity.

Why is the Repo Rate so Important?

As stated before, the Repo rate is important for a number of reasons. As a business owner, it helps you decide if the interest loan aligns with your repayment capacity. RBI, on the other hand, uses it to manage inflation. Here is why the Repo rate is so important:

• Regulates Money Supply: The cost of borrowing for banks increases as the Repo rate goes up. Banks then raise the interest rates on loans. It makes businesses borrow less money, which reduces money in circulation.
• Regulates Inflation: The Repo rate is an important monetary policy instrument for reducing inflation. RBI increases the Repo rate to reduce demand when inflation is strong. When the inflation is low, RBI again lowers the Repo rate to encourage investment and expenditure.
• Affects Borrowing Cost: If the Repo rate increases, banks also increase their rates of interest to borrowers. In return, this increases the interest rates at which the business owners take business loans.
• Guides Investment & Savings: Changes in Repo rates also impact interest rates on deposits. People are more likely to save when rates are high because savings accounts and FD yields increase.

There is, however, a difference between Repo rate and Reverse rate. The interest rate at which the RBI loans money to commercial banks is known as the repo rate, and the interest rate at which it borrows money from commercial banks is known as the reverse repo rate.

Who Decides the Repo Rate in India?

In India, the RBI’s Monetary Policy Committee (MPC) is responsible for setting the Repo rate. The committee sits every two months and decides to raise, lower, or keep the Repo rate based on economic signals and inflation patterns.

Repo Rate Today (As of 16 April 2025)

6%

Why Small Business Owners Should Care About the Repo Rate

Interest rates for business loans in India are often higher than those on home loans. What this means for you is that you are already paying more in interest when you apply for a business loan. Whenever there is a change in the Repo rate, there is a change in the business loan interest rate, as well.

If the Repo rate increases, borrowing becomes costlier for banks. In order to cover those costs, banks and lenders increase the interest rates, which burdens the repayment. When RBI reduces the Repo rate, banks and lenders also reduce the interest rate. This makes repaying business loans.

Small business owners, especially within the MSME (Micro, Small, and Medium Enterprise) category, are hit directly by changes in Repo rate. Even though the RBI Repo rate sounds like something only important for bankers and economists alone, it’s important for you, too. It affects your operations, EMIs on your borrowed amounts, and future investments. Here’s why you should know about the Repo rate for MSMEs and the Repo rate for small business loans:

1. Repo Rate = Cost of Borrowing

When the RBI reduces the Repo rate, banks have to pay less interest on the funds borrowed from the RBI. In turn, banks also charge lesser interest rates from borrowers such as small businesses. For MSMEs, it means that they get funds or loans at much lower costs, be it working capital loans, equipment finance, or term loans. For MSMEs, a lower Repo rate means a lower cost of borrowing and better working capital efficiency.

2. Working Capital Efficiency

If the Repo rate goes up and the interest rates go up with it, it becomes difficult for your business to manage working capital. Higher interest rates will affect your profits, particularly if you have tighter cash flow cycles to deal with.

3. Impact on Various Loan Products

If you are availing of an overdraft facility, invoice financing, or a line of credit, the rate of interest you’ll have to pay will depend on the Repo rate for business loans. For example, in low Repo rates, invoice discounting is more affordable, and it improves liquidity. However, when Repo rates are high, even your overdraft facilities become expensive to draw upon.

4. Business Planning & Forecasting

Imagine you’ve taken a floating- and short-rate term loan, and the RBI announces a Repo rate hike. Overnight, your EMIs increase, and your monthly cash outflow is higher. For MSMEs working on tight budgets, such changes can derail financial planning, affect vendor payments, and delay operational improvements.

5. Affects Investment and Expansion Decisions

Changes in the Repo rate influence whether companies opt to grow or hold back. When rates are low, they can borrow to invest in new infrastructure, R&D of new products, or expand geographically. But during a rate rise, even optimistic business owners wait and observe rather than keep cash.

The Reserve Bank of India (RBI) has lowered the Repo rate for MSMEs by 25 basis points to 6% in an effort to manage the turmoil in the world economy. 

How Repo Rate Affects Different Types of Business Loans

Business loans vary from lender to lender, and how changes in Repo rates will affect you depends on the different types of business loans. Being aware of this relation will help you to control your costs and make better choices among your funding options. Here’s how Repo rates for business loans will affect you:

1. Working Capital Loans

Working capital loans offer short-term financing to MSMEs for covering day-to-day operating costs like inventory, wages, and electricity. Small companies that rely heavily on working capital loans should closely observe the change in the Repo rate for efficient budgeting.

• When the Repo rate goes up, interest on working capital loans increases.
• This increases the rate of interest for everyone in the country and causes difficulties in managing day-to-day liquidity.
• When the Repo rates decline, companies can feel relief as they have to pay much lower interest rates.

2. Term Loans / Equipment Financing

These are long-term loans that businesses use for purchasing machinery, vehicles, or real estate. You must keep your risk appetite in mind and choose between fixed and floating interest cautiously when you apply for the term loans.

• If you have taken a loan based on a floating interest rate,  your EMIs will go up or down depending on the current Repo rate.
• A higher Repo rate results in increased monthly EMIs, affecting profit margins and cash flow.
• Fixed-rate term loans provide stability during rising Repo rate cycles, though they may be costlier upfront.

3. Overdraft (OD) Facilities

An overdraft facility provides businesses the freedom to withdraw amounts over their current account balance available up to the authorised limit. You must, however, use OD sparingly in high-rate cycles.

• Overdraft rates are tied to the base rate or external benchmark, which is directly related to the Repo rate for MSMEs.
• A rise in the Repo rate raises the cost of availing OD and makes emergency liquidity costlier.

4. NBFC vs Banks

The NBFC loans can offer easier reach but occasionally higher interest as well. Timing is everything. Compare NBFC and bank products, particularly around Monetary Policy announcements.

• NBFCs do not always change interest rates immediately as soon as the Repo rate for business loans changes.
• This delay can either benefit you (in the event of the rate going up) or affect you (if the rate is falling).

Another benefit of taking a business loan from NBFC is that you can apply for a collateral-free loan. FlexiLoans, for example, offers collateral-free business loans up to ₹50 lakh. It helps you get rid of quick financing without having to pledge assets, which promotes quicker expansion and lowers financial risk.

Impact of Repo Rate on Different Business Loans

Type of Business Loan	Effect of Repo Rate Hike	Effect of Repo Rate Cut
Working Capital Loans	Becomes costlier, and increases short-term operational costs	Becomes affordable and lowers the cost of maintaining day-to-day operations
Term Loans	New term loans cost more, whereas existing loans with floating rates see increased EMIs	Floating-rate loans become more affordable
Equipment Financing	Higher interest makes equipment investments less attractive	Lower borrowing costs encourage buying machinery
Overdraft Facility	Reduces cash flow flexibility	More affordable short-term liquidity
Invoice Financing	Affects small businesses with tight cash cycles	Enhances cash flow for SMEs
Line of Credit	Costlier to maintain and draw from lines of credit	Easier and cheaper access to revolving funds

Repo Rate and the Business Cycle

There is a direct relation between the Repo rate and inflation. When the inflation is high, RBI raises the Repo rate to reduce borrowing. In contrast, RBI lowers the Repo rate when the inflation is high to encourage borrowing.

To understand the impact of the Repo rate for business loans, you must understand how it affects the overall business cycle. The Reserve Bank of India (RBI) sets the Repo rate based on whether the economy requires a rise or fall. Here’s what happens in each case:

When RBI Raises the Repo Rate

• Objective: To curb inflation and hold back excess money supply.
• Effect: Borrowing becomes expensive for businesses, companies, and individuals.
• For Businesses: Increased rates result in increased cost of loans, postponed expansion plans, and strain on profitability.
• Macro Effect: There is a reduction in expenditure and demand and economic growth.
• Example: Between 2022 and early 2023, the RBI increased the Repo rate multiple times to address inflation from global energy shocks and COVID-19 recovery expenditures. Companies experienced their EMIs increasing and loan affordability decreasing.

When the RBI Lowers the Repo Rate

• Objective: Encourage economic activity, borrowing, and investment.
• Effect: Loans get more affordable, which allows companies to borrow loans at a much lower interest rate.
• For MSMEs: Usually, it’s an opportunity to invest in expansion, equities, hiring, or fresh machinery.
• Macro Impact: Higher liquidity in the system, enhanced demand, and economic revival.
• Example: During the COVID-19 pandemic, the RBI lowered Repo rates to record lows (4.0%) to help companies survive the recession. Hence, the lower interest rates helped companies to get loans during that period.

The Repo rate impact on economy is significantly noticeable as it affects borrowing rates, consumer spending, and economic growth in general.

How to Track the Repo Rate & Time Your Loans Smartly?

If you want to know the right time to take a business loan for MSMEs, checking the Repo rate today is the best option. It becomes more important as the RBI revises the Repo rate every 2 months. The RBI adjusts the Repo rate every two months. Hence, checking the RBI Repo rate today will help you a lot.

Where to Check the Latest RBI Repo Rate:

• RBI Website: For the most accurate and official answers, you must check the Repo rate on the RBI website itself.
• Financial News Portals: You can also visit financial news portals like Financial Express,  ClearTax, Moneycontrol and more.
• FlexiLoans Blog/Alerts: Besides all these, FlexiLoans also prove to be the most accessible way to check Report rates as it frequently posts blogs and alerts about RBI Repo rate changes.

Tips to Make Better Financial Decisions

• Fixed vs Floating Interest Rates: If Repo rates have been consistently low, borrow fixed-rate loans to benefit in the long run.
• Rate Cut: If there is a rate cut, borrowing floating-rate loans will come down with a decline in the Repo rate.
• Borrow from NBFCs: NBFCs can provide competitive terms, quicker processing and favourable terms.

Conclusion

The Repo rate has a great influence on the economy as changes in the Repo rate affect borrowing rates, consumer spending, and economic growth. From interest rates to repayment, it also affects business loans. This is why you must understand how the Repo rate affects your business loan to make wiser financial choices.

If you’re expanding your business or refinancing your existing loan, timing your decisions with the RBI Repo rate will help you save a lot of money in the long run. If you don’t want to wait, FlexiLoans offers fast, collateral-free MSME loans tailored to your business needs. Tap into smarter credit solutions today!

FAQs about Repo Rate