About REPO rate
RBI KEEPS REPO RATE UNCHANGED
🔶 CONTEXT
The Reserve Bank of India (RBI), in its recent Monetary Policy Committee (MPC) meeting, chose to keep the repo rate unchanged at 6.5% for the ninth consecutive time since February 2023, despite inflation appearing to stabilize. This signals a cautious stance balancing inflation control with growth support.
🔶 WHAT IS THE REPO RATE?
- The Repo Rate is the rate at which the RBI lends short-term money to commercial banks against government securities.
- It is the primary tool used by the RBI to control inflation and manage liquidity in the economy.
🔹 Repo Rate & Economic Impact:
| Repo Rate Status | Economic Outcome |
|---|---|
| Repo rate ↑ | Costlier borrowing → Decreased demand → ↓ Inflation |
| Repo rate ↓ | Cheaper loans → Increased demand → ↑ Inflation/Growth |
🔶 CURRENT MONETARY POLICY HIGHLIGHTS (April 2025 MPC Meeting)
| Parameter | Status |
|---|---|
| Repo Rate | 6.5% (unchanged since Feb 2023) |
| Policy Stance | Disinflationary while supporting growth |
| Standing Deposit Facility (SDF) | 6.25% |
| Marginal Standing Facility (MSF) & Bank Rate | 6.75% |
| GDP Growth Projection (2024–25) | 7.2% |
| CPI Inflation Projection (2024–25) | 4.5% |
🔶 WHY RBI DID NOT CUT INTEREST RATES?
1. Sticky Inflation
- CPI inflation remains above the target (5.1% in March 2025 vs. RBI target of 4%).
- Food price volatility continues to push headline inflation, even as core inflation (excluding food and fuel) remains moderate.
2. Commitment to Durable Disinflation
- RBI aims for sustained inflation near 4%, not just brief dips.
- Cutting rates too soon could reverse gains in price stability.
3. Strong Economic Growth
- With GDP expected to grow at 7.2%, the economy is showing resilience.
- No urgent need for rate cuts to spur demand-led recovery.
4. Fiscal Deficit & Union Budget Factors
- Government borrowing plans could crowd out private investment.
- Maintaining rates helps the RBI anchor inflation expectations.
🔶 TOOLS AVAILABLE WITH RBI TO MANAGE MONETARY POLICY
| Tool | Description | Impact |
|---|---|---|
| Open Market Operations (OMO) | RBI buys/sells govt securities | Affects liquidity and interest rates |
| Cash Reserve Ratio (CRR) | % of deposits banks keep with RBI | Higher CRR → Less money to lend |
| Statutory Liquidity Ratio (SLR) | % of deposits in govt securities | Impacts lending and liquidity |
| Repo/Reverse Repo Rate | Short-term lending/borrowing rates | Directly affects EMIs and investment |
🔶 IMPACT OF HIGH INTEREST RATES
✅ Positive Effects:
| Factor | Impact | Example |
|---|---|---|
| Inflation Control | ↓ Borrowing → ↓ Spending → ↓ Inflation | Inflation declined from 6.7% (2022) to 5.1% (2025) |
| Financial Stability | Attracts foreign capital → strengthens rupee | Forex reserves > $600 billion in 2023 |
| Promoting Savings | High deposit interest → Encourages saving | FDs >7% → Rise in household savings |
| Curb Asset Bubbles | Slows speculation | Real estate bubble defused in 2010–11 |
| Financial Discipline | Reduces reckless borrowing | Fewer NPAs and better credit practices |
❌ Negative Effects:
| Factor | Impact | Example |
|---|---|---|
| Slower Growth | High cost of capital → ↓ Investment | GDP slowdown in 2019–20 due to high rates |
| Debt Burden | Borrowers pay more → Defaults risk ↑ | SMEs face repayment issues |
| Investment Deterrence | Infrastructure, manufacturing hit | Long-term capital-intensive projects delayed |
| Lower Consumer Spending | Costly loans → ↓ Retail sales | Auto sales slowdown due to high loan rates |
| Currency Appreciation | Hurts exports | Rupee appreciation affected IT/textiles exports in 2023 |
🔶 RECENT ANNOUNCEMENTS IN APRIL 2025 MPC MEETING
1. Foreign Exchange Management Act (FEMA) Reforms
- Rationalization of export-import regulations.
- Aim: Improve ease of doing business.
2. Digital Payments Intelligence Platform (DPIP)
- AI-based platform to detect fraudulent digital transactions.
- Committee headed by A.P. Hota to design digital infra.
3. UPI Lite Auto Replenishment
- Integration with e-mandate framework.
- Enhances seamless digital micro-payments.
4. Bulk Deposit Definition Revised
- For Scheduled Commercial Banks: ₹3 crore+ term deposits now classified as “bulk.”
- Local Area Banks & RRBs threshold: ₹1 crore.
🔶 ABOUT THE MONETARY POLICY COMMITTEE (MPC)
| Feature | Details |
|---|---|
| Established by | Amendment to RBI Act, 1934 (2016) |
| Composition | 6 members: 3 from RBI, 3 from Govt |
| Voting | Each has 1 vote; RBI Governor has casting vote |
| Mandate | Maintain inflation at 4% (+/-2%), ensure growth and financial stability |
🔶 CONCLUSION
The RBI’s decision to maintain the repo rate highlights its prudence in ensuring durable inflation control while nurturing growth. Despite calls for rate cuts amid easing inflation, the central bank continues to prioritize macroeconomic stability, indicating a long-term view over short-term populist measures.
As global uncertainties persist and the domestic economy remains resilient, the MPC’s data-driven, calibrated approach will be pivotal in navigating India’s monetary landscape in FY 2024–25.