If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Banks have to pledge government securities as collateral. This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it has to provide government securities at least worth 1 billion (could be more because of margin requirement which is 5%–10% of loan amount) and agree to repurchase them at at the end of borrowing period. So the bank has paid as interest. This is the reason it is called repo rate.