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Critical Topics and Their Significance for the UPSC CSE Examination on February 08 20205

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RBI slashes rate by 0.25% to revive growth

For Preliminary Examination:  Repo rate, Reverse repo rate

For Mains Examination: GS III - Indian Economy

Context:

Lowering India’s interest rates for the first time in the last 57 months, the Monetary Policy Committee (MPC) of the Reserve Bank of India on Friday unanimously cut the repo rate by 25 basis points (bps) to 6.25%, to support fading growth in the hope of inflation easing to 4.4% in this quarter and 4.2% through 2025-26

Read about:

Monetary Policy Committee (MPC)

Reverse repo rate

Key takeaways:

• For the first time in nearly five years, India's Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to lower interest rates. On Friday, the committee unanimously reduced the repo rate by 25 basis points (bps) to 6.25%, aiming to revive slowing economic growth amid expectations that inflation will ease to 4.4% this quarter and 4.2% throughout 2025-26.
• This policy shift by the RBI, which could lead to reduced borrowing costs for housing, vehicles, and other loans, follows closely after the announcement of the Union Budget for 2025-26. The budget seeks to stimulate urban demand through income tax concessions worth ₹1 lakh crore.
• The repo rate, which refers to the interest rate at which the RBI lends to commercial banks, saw its last reduction in May 2020 during the initial phase of the COVID-19 pandemic when it was cut by 40 bps to 4%. Since 2022, however, the rate had been on an upward trajectory.
• Considering the ongoing risks posed by global economic uncertainties and inflationary pressures, the MPC has opted for a neutral stance. RBI Governor Sanjay Malhotra emphasized that the committee remains "firmly committed to ensuring inflation aligns with the target while also supporting economic growth." This was the first monetary policy review under Mr. Malhotra’s leadership.
• Highlighting concerns such as geopolitical conflicts, rising protectionist trade measures, fluctuations in global commodity prices, and financial market instability, the MPC has forecasted real GDP growth of 6.7% for 2025-26, compared to an estimated 6.4% for the current fiscal year.
• Assuming a normal monsoon next year, Mr. Malhotra noted that inflation is expected to moderate further, gradually aligning with the target. Inflation is projected to average 4.5% in the first quarter (Q1) of 2025-26, followed by 4% in Q2, 3.8% in Q3, and 4.2% in Q4

Significance of Repo Rate and Reverse Repo Rate

The repo rate and reverse repo rate play a fundamental role in India’s monetary policy, influencing liquidity, inflation, and overall economic growth. These rates are determined by the Reserve Bank of India (RBI) and serve as key instruments for regulating money flow in the financial system.

Significance of Repo Rate

• The repo rate (short for repurchase rate) is the interest rate at which commercial banks borrow short-term funds from the RBI by pledging government securities.
• It serves as a benchmark for interest rates across the banking sector and plays a crucial role in controlling inflation and boosting economic growth.