Sunday, 23 Mar, 2025
The repo rate was last brought down by the RBI in May 2020, more than five years ago.
The decision was taken just one week after the Center reduced personal income taxes in an effort to boost consumption.
The Repo Rate, the rate at which the Reserve Bank of India (RBI) lends to other banks in the country was brought down by 25 basis points to 6.25 percent from 6.50 percent. The decision was taken during the RBI’s Monetary Policy Committee (MPC) meeting. The repo rate was last brought down by the RBI in May 2020, more than five years ago.
The decision was taken just one week after the Center reduced personal income taxes in an effort to boost consumption. In an attempt to boost economic activity by making borrowing more affordable, the RBI's MPC unanimously decided to decrease the repo rate, which in turn encouraged investment and spending. However, the MPC chose to stick with its "neutral" economic approach, which RBI Governor Sanjay Malhotra indicated would give them flexibility in responding to the changing macroeconomic landscape. Malhotra stated that average inflation has decreased since the framework's adoption and that it has performed well for the Indian economy over the years, even during the extremely difficult time following the pandemic. With the exception of a few instances when it has exceeded the upper tolerance band, he continued, the CPI has generally been in line with the target since the framework's implementation.
According to the RBI Governor, the RBI and MPC will continue to use the flexibility built into the inflation targeting framework to improve macroeconomic outcomes in the economy's best interest while responding to the changing growth-inflation dynamics. The RBI Governor also stated that the framework's fundamental components will be further improved by developing more robust models, advancing the use of new data, and improving forecasting of important macroeconomic variables.
Source: Reserve Bank of India
With US President Donald Trump placing tariffs on China, Canada, and Mexico, the policy is being announced in the midst of global unrest. A month has been added to the tariffs on Canada and Mexico. The dollar rose against other major currencies on Monday as a result of the tariffs, which have also sparked fears of international trade conflicts.
In addition, the MPC reduced its growth estimate for FY25 from 6.6 percent to 6.4 percent, citing possible threats from protectionist trade policies, global commodity price volatility, financial market concerns, and geopolitical tensions. It projects a slight improvement in India's economic growth to 6.7 percent in 2025–2026. Although growing food costs have been the main cause of inflation, which has been a serious problem hurting India's growth prospects, inflation has recently been slowing down, eventually allowing for a rate cut. Due to declining food costs, India's retail inflation dropped to 5.22 percent in December, a four-month low.
Source: Ministry of Statistics and Programme Implementation
The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was last increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.
RBI Governor Sanjay Malhotra while commenting on the inflation said, “Assuming a normal monsoon next year, CPI inflation for 2025-26 is projected at 4.2 percent with Q1 at 4.5 percent; Q2 at 4 percent; Q3 at 3.8 percent; and Q4 at 4.2 percent. MPC noted that inflation has declined, supported by a favourable outlook on food and continued transmission of past monetary policy action. It is expected to further moderate in 2025-26, gradually aligning with the target. The MPC also noted that while growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. This growth-inflation dynamic opens up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target.”
All stakeholders were also reassured by Sanjay Malhotra that the central bank will stick to the consultative procedure it has been using for years when formulating regulations. He went on to say that before making any significant decisions, the opinions of stakeholders are important and will be taken into account.
According to Malhotra, the RBI would make sure that the implementation of such regulations goes smoothly and that enough time is allowed for the transition. In cases where the regulations have significant ramifications, the implementation will be carried out gradually. The RBI Governor discussed the current state of the economy, stating that although high frequency indicators point to resilience and ongoing trade growth, the global economy is currently expanding below the historic average.
He added that as expectations about the scope and speed of rate cuts in the US have decreased, the dollar has grown stronger, bond yields have gotten harder, and emerging market economies have seen significant capital flight, which has caused their currencies to depreciate sharply and tighten financial conditions. He said, “Divergent trajectory of monetary policy across advanced economies, lingering geopolitical tensions, and elevated trade and policy uncertainties have exacerbated financial market volatility. Such an uncertain global environment has posed uncertain policy trade-offs in emerging market economies.”
Commenting on the RBI’s MPC’s decision to slash the repo rate, Madan Sabnavis, Chief Economist at Bank of Baroda said, “The cut in repo rate and the commentary does indicate that the MPC could be looking more at the inflation-growth dynamics instead of only inflation which was the earlier perception. Therefore, we could expect more rate cuts based on economic data.”
