RBI cuts repo rate by 0.25%, trims GDP growth forecast

For Preliminary Examination:  Current events of national and international Significance

For Mains Examination: GS III - Economy

Context:

The Reserve Bank of India slashed the repo rate by 25 basis points to 6% on Wednesday, with its Monetary Policy Committee (MPC) voting unanimously to reduce the policy rate in a bid to support growth and bring down the interest burden on home, auto, and other loan borrowers. However, this will also reduce the interest earned on savings by depositors.

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Monetary Policy Committee (MPC)

Reverse repo rate

Key takeaways:

The Repo Rate and Reverse Repo Rate are key monetary policy tools used by central banks (like the Reserve Bank of India - RBI) to control liquidity and inflation in the economy. Here's a breakdown:

1. Repo Rate (Repurchase Rate)

• Definition: The rate at which the central bank (RBI) lends money to commercial banks for short-term needs (against government securities as collateral).

• Purpose: Controls inflation and boosts economic growth.

  • If inflation is high, RBI increases the repo rate → borrowing becomes costlier → reduces money supply → lowers inflation.

  • If growth is slow, RBI decreases the repo rate → cheaper loans → more spending & investment → boosts growth.

• Current Repo Rate (as of RBI's latest policy, June 2024): 6.50% (unchanged since February 2023).

2. Reverse Repo Rate

• Definition: The rate at which the central bank borrows money from commercial banks (banks park excess funds with RBI and earn interest).

• Purpose: Manages liquidity in the banking system.

  • A higher reverse repo rate encourages banks to deposit more funds with RBI → reduces money supply.

  • A lower reverse repo rate discourages banks from parking money with RBI → increases lending in the market.

• Current Reverse Repo Rate: 3.35% (since the RBI merged it with the Standing Deposit Facility - SDF rate).

Key Differences

Feature	Repo Rate	Reverse Repo Rate
Transaction	RBI lends to banks	RBI borrows from banks
Collateral	Banks pledge securities	No collate Share to Social IMPM KEYS Plans You need Login/Register first. Login Register Close Total Attempted: Not Attempted: Mark as Review: Submit Close Register now Sign Up Already have an account? Sign In Continue with google Close