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Critical Topics and Their Significance for the UPSC CSE Examination on June 07, 2025

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RBI cuts repo to 5.5%, also reduces CRR

For Preliminary Examination: Current events of national and international significance

For Mains Examination: GS III - Economy

Context:

In a bid to spur growth at a time when inflation has come under control, the Reserve Bank of India’s Monetary Policy Committee on Friday voted 5:1 to slash the policy repo rate by a bigger-than-expected 50 basis points to 5.50% with immediate effect. This is the RBI’s third repo rate cut since February

Read about:

Cash reserve ratio (CRR)

Consumer price index (CPI)

Monetary policy statement (MPC)

Key takeaways:

• The reduction in the Cash Reserve Ratio (CRR) is expected to inject approximately ₹2.5 lakh crore of core liquidity into the banking sector by December 2025. This move is designed not only to provide lasting liquidity but also to lower banks’ funding costs, thereby enhancing the effectiveness of monetary policy in influencing credit markets.
• The CRR will be gradually lowered to 3% of Net Demand and Time Liabilities (NDTL) through four successive 25 basis point cuts, which will be implemented starting from the fortnights beginning on September 6, October 4, November 1, and November 29. (Note: One basis point equals 0.01%).
• According to the Reserve Bank of India (RBI), this step aligns with its aim to bring consumer price index (CPI) inflation to its medium-term target of 4%, within a tolerance range of ±2%, while still supporting economic expansion.
• Factoring in several economic variables, the projected real GDP growth for the fiscal year 2025–26 remains steady at 6.5%.
• Despite uncertainties in the global economic environment, the Monetary Policy Committee (MPC) expects India’s economy to remain resilient through 2025–26, backed by solid private consumption and robust investments in fixed assets.
• The central bank noted that ongoing strength in rural areas should bolster rural demand, while the continued growth of the services sector is likely to aid in reviving urban consumption.
• Investment activity is projected to pick up, supported by increased capacity usage, healthier balance sheets of both financial and non-financial firms, and enhanced government capital spending.
• With inflation staying within the RBI’s tolerance threshold and assuming normal monsoon conditions, CPI inflation for 2025–26 has been revised downward from 4% to 3.7%. The quarterly breakdown is as follows: 2.9% in Q1, 3.4% in Q2, 3.9% in Q3, and 4.4% in Q4.
• The MPC has also shifted its policy stance from "accommodative" to "neutral," allowing flexibility to adjust the repo rate if inflationary conditions evolve. After a cumulative reduction of 100 basis points in the repo rate since February 2025, the committee acknowledged that further rate cuts may not be feasible under current conditions, prompting the shift in stance.
• Additionally, banks and non-banking financial companies (NBFCs) operating in the affected segments are already adjusting their business strategies. This includes enhancing credit assessment processes and intensifying collection efforts to prevent the accumulation of high-risk assets going f