11th April 2025 (12 Topics)

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RBI’s Repo Rate

Context

The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points (bps), from 6.25% to 6%, in its latest policy review. The monetary policy stance has been shifted from neutral to accommodative, meaning the RBI may cut rates further if needed to support growth.

What is the Repo Rate?

Repo stands for “Re Purchase Option”.
It is the rate at which the central bank (Reserve Bank of India)lends to other banks by buying the securities with an agreement that the bank will buy back on a certain date.
Repo lending is a short-term lending option to meet the liquidity requirements of commercial banks.
It is a part of the Liquidity Adjustment Facility (LAF)of the RBI.
Impacts of repo rate:

Increased repo rate	Decreased repo rate
It will discourage banks to borrow from the RBI and lending to the customers. This in turn will reduce the liquidity and demand in the market. It is part of the contractionary monetary policy.	It will encourage banks to borrow and lend to customers increasing the liquidity and demand in the market. This is a part of the Expansionary Monetary Policy.

Why has the RBI cut the repo rate?

Falling Inflation: Jan-Feb 2025 inflation averaged 9%, lower than expected. RBI’s CPI projection for Q4 FY25 is 4.8%, and for FY26 it is 4%. Lower inflation gives RBI space to reduce rates to spur demand.
Slowing Growth: RBI revised GDP growth forecast for FY26 to 6.5%, down from 6.7%. Global economic uncertainty (including US tariff increases) is creating downside risks to growth.
External Factors: Global trade tensions and geopolitical anxieties have increased.

Fact Box:

RBI’s Monetary Policy

Monetary Policy refers to the actions taken by a country’s central bank (in India, the RBI) to control the money supply, manage inflation, and stabilize the economy.
It influences economic activity by adjusting interest rates and regulating the supply of money.
There are two main types of monetary policy:

Expansionary Monetary Policy (Loose Policy)

Contractionary Monetary Policy (Tight Policy)

It is aimed at stimulating the economy.
It is used when the economy is slowing down or facing a recession.
The central bank lowers interest rates to make borrowing cheaper, which encourages businesses to invest and consumers to spend.
It increases the money supply, making it easier for people to borrow money and spend it.
Example: If the RBI lowers the repo rate, it makes loans cheaper and encourages investment and spending, boosting the economy.

It is aimed at controlling inflation or an overheating economy.
It is used when the economy is growing too quickly, and prices are rising too fast (inflation).
The central bank raises interest rates to make borrowing more expensive and to reduce the money supply in the economy.
It aims to reduce inflation by discouraging excessive borrowing and spending.
Example: If the RBI raises the repo rate, loans become more expensive, and people borrow less, which helps slow down inflation.

Important rates

Reverse repo rate: The interest rate that the RBI pays commercial banks when they park their excess cash with the central bank is called the reverse repo rate
Bank rate: It is the rate charged by the central bank for lending funds to commercial banks.
Statutory Liquid Ratio: A commercial bank must retain a percentage of liquid cash, gold or other securities as deposits. This is known as Statutory Liquid Ratio or SLR.
Cash Reserve Ratio (CRR): It is a percentage of deposits required by commercial banks to be maintained in the form of liquid cash with the RBI as reserves.
Marginal Standing Facility Rate (MSF): It is a facility extended to commercial banks by the RBI in the event of an emergency to obtain liquidity overnight.

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RBI’s Repo Rate

What is the Repo Rate?

Why has the RBI cut the repo rate?

Fact Box:

RBI’s Monetary Policy

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