RBI Cuts Repo Rate to Boost Economic Growth

Why in the news?

The Reserve Bank of India cut the repo rate by 0.25% to 6.25%, the first reduction since May 2020, aiming to stimulate growth, ease borrowing costs, and manage inflation projected to decline to 4.2% in 2025-26.

RBI Cuts Repo Rate to Boost Economic Growth

Policy Decision and Implications:

  • The Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 25%, marking the first reduction since May 2020.
  • The decision aims to support fading economic growth and control inflation, projected at 4% this quarter and 4.2% for 2025-26.
  • The rate cut may lead to cheaper home, car, and personal loans.

Economic Context and Projections

  • The RBI forecasts real GDP growth of 6.7% for 2025-26, up from the 4% estimated this year.
  • Factors like geopolitical tensions, volatile commodity prices, and global uncertainties pose risks to growth.
  • Inflation is expected to average 5% in Q1 of 2025-26, gradually declining to 4.2% by Q4.

Governor’s Insights and Market Stability

  • RBI Governor Sanjay Malhotra highlighted mixed economic signals, with rural demand rising and urban consumption subdued.
  • Tax relief measures and moderating inflation are expected to support household consumption.
  • The RBI emphasized maintaining currency stability, with foreign exchange reserves at $630.6 billion, providing over 10 months of import cover.
  • To ease liquidity constraints, the RBI pledged to proactively monitor and intervene to maintain financial stability.

What is Repo Rate?

  • Definition: The Repo Rate (Repurchase Agreement Rate) is the interest rate at which commercial banks borrow money from the central bank.
  • Purpose & Functioning:
  • Helps banks meet short-term liquidity needs.
  • Banks provide securities as collateral and repurchase them later at a higher price.
  • Impact on Borrowing Costs:
  • Higher repo rate: Costlier loans, reduced borrowing, slower spending.
  • Lower repo rate: Cheaper loans, increased borrowing, boosted spending.
  • Monetary Policy Role: Used to regulate money supply, inflation, and economic growth.