NEWS – RBI Cuts Repo Rate by 0.25%, Trims GDP Growth Forecast

HIGHLIGHTS

• The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points, bringing it down to 6%.
• This move was unanimously decided by the Monetary Policy Committee (MPC).
• It is aimed at:
  • Supporting economic growth
  • Reducing interest burden on borrowers (home, auto, etc.)
• However, depositors may earn less interest on savings.

Global Context: Trade War Impact

• The decision is influenced by global trade tensions, particularly:
  • Tariffs imposed by the U.S. under President Trump
• The MPC believes trade wars could:
  • Harm domestic growth
  • Increase uncertainty in investment and consumption decisions

GDP Growth Forecast Revised

• The GDP growth forecast for 2025-26 has been revised down from 6.7% to 6.5%.
• Quarterly breakdown:
  • Q1: 6.5%
  • Q2: 6.7%
  • Q3: 6.6%
  • Q4: 6.3%
• RBI Governor Sanjay Malhotra highlighted that:
  • Global uncertainties increase forecast risks
  • The outlook remains volatile

 Shift in Policy Stance

• The policy stance has shifted from neutral to accommodative.
  • This indicates a pro-growth approach
  • Signals possible future rate cuts
• Governor Malhotra stated:
  • “Uncertainty in itself dampens growth…”

Inflation Outlook: Balanced Risks

• Inflation risks are seen as two-sided:
  • Upside risks: Currency pressures, imported inflation
  • Downside risks: Falling global commodity and crude prices
• The RBI expects inflation to remain manageable, but remains vigilant.

Adjusted Lending & Deposit Rates

• Following the repo rate cut:
  • Standing Deposit Facility (SDF): 5.75%
  • Marginal Standing Facility (MSF) and Bank Rate: 6.25%

WHAT IS REPO RATE?

 Role of Commercial Banks

• People approach commercial banks for:
  • Depositing savings (banks pay interest).
  • Taking loans (banks charge interest).
• The difference between the interest received on loans and interest paid on deposits is how banks earn profit.

 The Role of RBI

• Commercial banks also borrow from or deposit money with the Reserve Bank of India (RBI).
• The repo rate is:
  • The interest rate at which RBI lends money to commercial banks.
• The reverse repo rate is:
  • The interest rate RBI pays to banks when they deposit excess funds with the central bank.
• Current rates:
  • Repo Rate: 6%
  • Reverse Repo Rate: 3.35%

WHY DOES THE REPO RATE MATTER?

To Stimulate Economic Activity

• When RBI reduces the repo rate:
  • Banks can borrow more cheaply.
  • They lower interest rates on loans and deposits.
  • Outcome:

• Increased consumer spending (savings earn less interest).
• Higher investment by businesses (loans are cheaper).

To Control Inflation

• When RBI increases the repo rate:
  • Borrowing becomes costlier for banks.
  • Banks increase interest rates on loans and deposits.
  • Outcome:

• Lower borrowing and spending.
• Reduced money supply, helping to control inflation.

• Thus, repo and reverse repo rates act as benchmark interest rates that influence the entire economy.

WHY HAS RBI REDUCED THE REPO RATE?

Global Economic Uncertainty

• Triggered by:
  • Reciprocal tariffs and trade frictions (e.g., US tariff policies).
  • A sluggish global economic outlook in FY26.

Inflation Under Control

• January–February inflation: 3.9%, below RBI’s projected 4.8% for Q4 FY2025.
• RBI’s focus: Supporting economic growth over curbing inflation at the moment.