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The Reserve Bank of India (RBI) held its Monetory Policy Committee (MPC) meeting on June 6, 2025. And announced a significant set of policy changes aimed at boosting economic growth and improving liquidity in the banking system.
Repo Rate Cut
As of June 6, 2025, the Reserve Bank of India (RBI) has reduced the repo rate to 5.50% from the previous rate of 6.00%. This marks a significant cut of 50 basis points (bps) and is part of a series of reductions aimed at supporting economic growth amid subdued economic momentum and easing inflation. The RBI has now cumulatively cut the repo rate by 100 bps since February 2025.
In addition to the repo rate cut, the RBI has also changed its monetary policy stance from "accommodative" to "neutral," indicating a pause to assess the impact of these cuts before considering further actions. The reverse repo rate remains unchanged at 3.35%.
This reduction in the repo rate is expected to lower borrowing costs for consumers and businesses, potentially leading to decreased Equated Monthly Installments (EMIs) on loans.
Significance of Repo Rate Cut
The repo rate cut by the Reserve Bank of India (RBI) holds significant implications for the economy, financial markets, and consumers. Here are some key points highlighting its significance:
1. Lower Borrowing Costs - A reduction in the repo rate decreases the cost of borrowing for banks, which can lead to lower interest rates on loans for consumers and businesses. This can stimulate spending and investment.
2. Economic Growth - By making loans cheaper, a repo rate cut encourages businesses to invest in expansion and consumers to spend more. This can help boost economic growth, especially during periods of economic slowdown.
3. Inflation Control - The RBI often adjusts the repo rate in response to inflation trends. A cut may indicate that the RBI is prioritizing growth over inflation concerns, especially if inflation is under control.
4. Impact on Financial Markets - Lower interest rates can lead to higher stock market valuations as investors seek better returns in equities compared to fixed-income securities. This can boost investor sentiment and market liquidity.
5. Encouragement of Consumption - With lower EMIs on loans, consumers may be more inclined to make significant purchases, such as homes and vehicles, which can further stimulate economic activity.
6. Support for Sectors - Certain sectors, such as real estate, automotive, and consumer goods, may benefit significantly from lower borrowing costs, leading to increased production and job creation.
7. Currency Impact - A repo rate cut can lead to depreciation of the national currency as lower interest rates may reduce foreign investment inflows. This can affect trade balances and import costs.
8. Long-term Monetary Policy Strategy - The decision to cut the repo rate reflects the RBI's broader monetary policy strategy, indicating its focus on balancing growth and inflation. It may also signal a shift in the economic outlook.
Cash Reserve Ratio (CRR)
CRR reduced by 100 bps (from 4.5% to 3.5%). Gradual rollout in four equal tranches starting September 6, 2025.
Definition
Cash Reserve Ratio (CRR) is the percentage of a bank's total deposits that must be maintained as reserves in the form of cash with the central bank. This reserve is not available for lending or investment.
Purpose
1. Liquidity Management: This cut is expected to inject 2.5 lakh crore of liquidity into the banking system over time. By adjusting the CRR, the central bank can control the amount of funds available for banks to lend.
2. Financial Stability: Maintaining a certain level of reserves ensures that banks have enough liquidity to meet customer withdrawals and other obligations, promoting stability in the banking system.
3. Inflation Control: By increasing the CRR, retail inflation in April was 3.16%, a six-year low. The FY26 inflation forecast has been revised down to 3.7% from 4%. The RBI's inflation target range is 2%-6%, with a medium-term goal of 4%. With inflation well under control, the RBI has more room to cut interest rates without stoking price rises. Low inflation also helps consumers maintain purchasing power.
Impact on Banking Operations
Lending Capacity: A higher CRR means banks have less money to lend, which can lead to higher interest rates. Conversely, a lower CRR increases the funds available for lending, potentially lowering interest rates.
Profitability: Since the funds held as CRR do not earn interest, a higher CRR can impact banks' profitability.
Current Trends - The CRR is periodically reviewed and adjusted by the RBI based on economic conditions, inflation rates, and overall monetary policy objectives. Changes in the CRR can have immediate effects on the banking sector and the economy.
Change in policy stance from accomodative to neutral. A neutral stance gives RBI more flaxibility it is neither commited to cutting nor increasing rates in the near future. Reflects that while inflation is under control, the RBI will now balance growth and inflation risks more evenly.
GDP Growth Forecast
The RBI has projected a 6.5% growth rate for India's GDP in the current financial year. This growth rate, while robust, reflects a decline from the 9.2% growth recorded in the previous financial year (FY24).
The growth will likely be supported by
- Strong domestic demand
- Government infrastructure spending
- Improved rural consumption
- Real estate and housing
- MSMEs
- Consumer goods and services
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