The Reserve Bank of India (RBI) has made move by cutting the repo rate by 25 basis points to 6.25 per cent. This decision, made on February 7, 2025, marks the first reduction in nearly five years. The RBI’s Monetary Policy Committee (MPC) aims to stimulate economic activity by making borrowing cheaper. This policy shift is a response to evolving economic conditions, focusing on growth while managing inflation.
About Repo Rate
The repo rate is the rate at which the RBI lends money to commercial banks. A lower repo rate reduces borrowing costs for banks, which can lead to lower interest rates for consumers and businesses. This encourages spending and investment, essential for economic growth.
Reasons for the Rate Cut
The primary reason for the rate cut is to stimulate economic growth. With inflation within the RBI’s target range, a lower rate can help maintain price stability. The RBI aims to make credit more accessible, thereby encouraging borrowers to spend and invest. This can lead to increased job creation and economic activity.
Impact on Borrowers and Loans
The reduction in the repo rate will lead to a decrease in all external benchmark lending rates (EBLR). Borrowers can expect lower equated monthly instalments (EMIs) on home and personal loans. This makes it easier for individuals to manage their debts. Additionally, banks may lower interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR).
Potential Consequences of a Lower Repo Rate
While a lower repo rate can boost economic growth, it may also lead to higher inflation. Increased money supply can drive up prices. Furthermore, lower interest rates may reduce the appeal of savings, affecting individuals’ willingness to save. The RBI’s decision is influenced by various factors, including inflation trends and global economic conditions.
GDP Growth and Inflation Projections
The RBI has projected GDP growth at 6.7 per cent for the fiscal year 2025-26. This follows a revision of the GDP growth estimate for FY2024-25 to 6.4 per cent. Retail inflation is expected to be 4.2 per cent in 2025-26. Recent trends show a moderation in inflation, with prices of essential commodities easing, contributing positively to the inflation outlook.
Global Economic Trends
The RBI’s decision aligns with global trends, where many central banks have adopted accommodative monetary policies. The aim is to encourage growth in response to slowing economies worldwide. This global context plays important role in shaping India’s monetary policy decisions.
Questions for UPSC:
- Critically analyse the implications of the RBI’s repo rate cut on the Indian economy.
- Estimate the potential impact of lower interest rates on consumer behaviour and spending patterns.
- Point out the relationship between inflation rates and monetary policy decisions in India.
- What are the global economic factors influencing the RBI’s monetary policy? Discuss with suitable examples.
Answer Hints:
1. Critically analyse the implications of the RBI’s repo rate cut on the Indian economy.
- Lower borrowing costs encourage consumer spending and business investment.
- Potential increase in GDP growth due to enhanced economic activity.
- Reduced EMIs provide relief to borrowers, improving financial stability.
- Risk of higher inflation due to increased money supply and spending.
- Alignment with global monetary easing trends enhances competitive positioning.
2. Estimate the potential impact of lower interest rates on consumer behaviour and spending patterns.
- Lower interest rates make loans cheaper, encouraging borrowing.
- Increased disposable income leads to higher consumer spending on goods and services.
- Potential rise in demand for housing and vehicles due to reduced EMIs.
- Shift in consumer preference towards financing rather than saving.
- Long-term impact may include increased consumer confidence and economic growth.
3. Point out the relationship between inflation rates and monetary policy decisions in India.
- The RBI targets a specific inflation range to maintain price stability.
- Rate cuts are implemented when inflation is controlled and within target limits.
- High inflation may prompt rate hikes to cool down the economy.
- Monetary policy adjustments reflect the balance between growth and inflation control.
- Inflation trends influence consumer and investor confidence, impacting overall economic health.
4. What are the global economic factors influencing the RBI’s monetary policy? Discuss with suitable examples.
- Global interest rate trends affect domestic borrowing costs and competitiveness.
- International trade dynamics can impact inflation and economic growth rates.
- Global economic slowdowns may prompt accommodative policies to stimulate growth.
- Examples include the US Federal Reserve’s policies influencing global liquidity.
- Exchange rate fluctuations and commodity prices also play role.
