Repo rate is the rate at which Reserve Bank of India lends money to commercial banks in the cases or events of any shortfall of funds. Repo Rate is used by authorities to arrest inflation.
In the event of inflation, RBI increase repo rate as this acts as a financial dis-advantage for banks to borrow from the RBI. This ultimately reduces the money supply in the economy and thus helps in controlling inflation.
RBI which is central bank of India takes the opposite position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.