On February 7, 2025, the Reserve Bank of India (RBI) announced a 25 basis points reduction in the repo rate, bringing it down to 6.25%. This marks the first rate cut since May 2020, reflecting the central bank’s efforts to stimulate economic growth amid easing inflationary pressures.
Current repo rate is at 6.25%
Current reverse repo rate is at 3.35%
Latest Update: 7th February 2025
Key Highlights from the RBI’s Monetary Policy Announcement:
- Repo Rate Reduction: The Monetary Policy Committee (MPC) unanimously decided to lower the repo rate by 25 basis points to 6.25%. Consequently, the standing deposit facility (SDF) rate was adjusted to 6.00%, and both the marginal standing facility (MSF) rate and the Bank Rate were set at 6.50%.
- Monetary Policy Stance: Despite the rate cut, the MPC maintained a neutral stance, emphasizing the need to balance inflation alignment with support for economic growth. RBI Governor Sanjay Malhotra highlighted the “tremendous uncertainties” in the global economic environment, suggesting that a less restrictive policy is appropriate for the current context.
- Inflation Outlook: The RBI projected headline inflation to average 4.8% for the fiscal year 2024-25, with expectations of it easing to 4.2% in 2025-26. Factors contributing to this outlook include anticipated moderation in food prices due to favorable agricultural output and subdued core inflation trends.
- Growth Projections: The central bank forecasted a real GDP growth rate of 6.7% for the fiscal year 2025-26. This optimism is underpinned by strong household consumption, bolstered by recent tax relief measures, and a recovery in private investment driven by high capacity utilization and healthy corporate balance sheets.
Implications for the Economy:
The repo rate cut is anticipated to lower borrowing costs for consumers and businesses, potentially stimulating demand in sectors such as housing and automobiles. However, challenges remain, including the effective transmission of rate cuts by banks, potential inflationary pressures from higher import costs due to currency depreciation, and global economic uncertainties. Analysts suggest that while the rate cut provides a boost, additional monetary and fiscal measures may be necessary to sustain and accelerate economic growth.
In summary, the RBI’s decision to reduce the repo rate reflects a strategic move to support economic activity while remaining vigilant of inflation dynamics and external risks. The central bank’s balanced approach aims to foster a conducive environment for sustainable growth in the face of evolving global and domestic challenges.
Reserve Bank of India Lends money to Commercial Banks at Repo rate, i.e. Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.
What is BPS or Basis Point?
Basis points, also referred to as “bps” are a unit of measurement used in finance to express the rate of change in an index or other benchmark or the percentage change in the value of financial instruments. In decimal notation, one basis point is equal to 0.0001 or 0.01% (1/100th of a percent).
How Does Repo Rate Work?
When you borrow money from the bank, the transaction attracts interest on the principal amount. This is referred to as the cost of credit. Similarly, banks also borrow money from RBI during a cash crunch on which they are required to pay interest to the Central Bank. This interest rate is called the repo rate.
Technically, repo stands for ‘Repurchasing Option’ or ‘Repurchase Agreement’. It is an agreement in which banks provide eligible securities such as Treasury Bills to the RBI while availing overnight loans. An agreement to repurchase them at a predetermined price will also be in place. Thus, the bank gets the cash and the central bank the security.
