Monetary Policy Decision by RBI

The Reserve Bank of India's (RBI) six-member Monetary Policy Committee (MPC) decided to cut the repo rate by 25 basis points to 6% on April 9. The committee also shifted the monetary policy stance from “neutral” to “accommodative,” indicating potential future repo rate reductions.

Understanding the Repo Rate

• The repo rate is the interest rate charged by the RBI when commercial banks borrow money from it.
• The reverse repo rate is the rate at which the central bank pays interest to commercial banks for parking their excess cash.
• Currently, the repo rate is at 6%, and the reverse repo rate is at 3.35%.

Significance of the Repo Rate

The RBI uses the repo and reverse repo rates to influence other interest rates in the banking system and the broader economy.

• To encourage economic activity, the RBI reduces the repo rate, prompting banks to lower interest rates on loans and deposits.
• To control inflation, the RBI increases the repo rate, making borrowing more expensive, thus discouraging spending and reducing money in circulation.

Reasons for the Repo Rate Reduction

The decision was made in response to global economic uncertainties, particularly the reciprocal tariffs announced by the US under the Trump administration. The RBI is more concerned about economic sluggishness than inflation, which was at an average of 3.9% for January-February, below the RBI's projections.

Inflation Projections

The RBI has projected a consumer price-based inflation (CPI) rate of 4.8% for the fourth quarter of fiscal 2025.