RBI Slashes Repo Rate by 0.25% to Revive Growth

Sub: Eco

Sec: Monetary Policy

Key Takeaways from the RBI decision

The Reserve Bank of India (RBI) cut the repo rate by 25 basis points (bps) to 6.25%, marking the first rate cut since May 2020.
The decision aims to stimulate economic growth and follows the Union Budget’s ₹1 lakh crore income tax breaks to boost urban demand.
Inflation is projected to decline, making room for monetary easing.
GDP growth for 2025-26 is projected at 6.7% (up from 6.4% this year).
The RBI maintains a neutral monetary policy stance, balancing inflation control with growth support.

Why Did the RBI Cut the Repo Rate?

Slowing Growth & Need for Stimulus

Growth is losing momentum, and the government is using both fiscal (tax cuts) and monetary (rate cuts) tools to revive demand.
Lower interest rates reduce borrowing costs, making home, car, and business loans cheaper, potentially boosting consumption.

Inflation Expected to Stay Under Control

Inflation projections: Q1 2025-26 → 4.5%
With inflation moderating and remaining within the RBI’s target range (4% ± 2%), a rate cut was feasible.

Economic Risks & Challenges

Global Uncertainties & Trade Risks

Geopolitical tensions, protectionist trade policies, and volatile commodity prices pose risks to growth.
The RBI is cautious but expects gradual economic recovery.

Mixed Domestic Demand Trends

Rural demand is improving, but urban consumption remains subdued.
Employment gains, tax relief, and stable inflation are expected to support household consumption.

India’s External Sector:

Rupee depreciation factored into policy decisions; RBI aims to maintain stability without direct intervention in forex markets.
Current Account Deficit (CAD) remains within sustainable limits.
Foreign exchange reserves at $630.6 billion (covering 10+ months of imports), signalling resilience.

Monetary Policy Stances

Dovish: The central bank reduces interest rates or maintains a low-rate environment to stimulate economic growth and encourage borrowing and investment.
Hawkish: The central bank raises interest rates to curb inflation and prevent an overheating economy, even at the cost of slowing down growth.
Accommodative: The central bank keeps interest rates low and injects liquidity into the economy to support growth and employment.
Neutral: The central bank maintains a balanced approach, where interest rate changes are data-driven, without a strong bias toward economic expansion or contraction.