REPO RATE CUT BY RBI
Why is this issue in the news?
- The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points (bps), reducing it from 5.50% to 5.25%.
- This decision was taken by the Monetary Policy Committee (MPC) in its December 2025 policy meeting.
- The RBI Governor described the current situation as a “rare Goldilocks period”, where economic growth is strong and inflation is low and stable.
- This move is expected to reduce loan interest rates, lower EMIs, and support economic growth.
WHAT IS THE REPO RATE?
- The repo rate is the interest rate at which RBI lends money to commercial banks.
- When the repo rate is cut:
- Banks can borrow at a lower cost.
- Lending rates usually come down.
- Loans become cheaper for consumers and businesses.
- Therefore, a repo rate cut is a growth-supporting monetary policy tool.
WHAT IS MPC?
- The Monetary Policy Committee (MPC) is the body responsible for deciding India’s monetary policy, especially interest rates.
- It was established under the RBI Act, 1934, through an amendment in 2016.
Composition of the MPC
- The committee has six members.
- Three members are from the RBI:
- The RBI Governor (Chairperson)
- One Deputy Governor
- One RBI official nominated by the Central Board of the RBI
- Three members are external experts appointed by the Central Government.
How does MPC take decisions?
- Each member has one vote.
- Decisions are taken by majority voting.
- In case of a tie, the RBI Governor has a casting vote.
Main objectives of the MPC
- To maintain price stability, meaning control inflation.
- To support economic growth, without allowing inflation to rise uncontrollably.
- To achieve the inflation target of 4% ± 2% under the inflation targeting framework.
KEY DECISION OF RBI MPC
- The repo rate was cut by 25 bps to 5.25%.
- This decision was taken unanimously by the MPC.
- This was the first repo rate cut after two consecutive policy pauses.
- The previous rate cut took place in June 2025, when the repo rate was reduced by 50 bps.
- Total repo rate cut in FY 2025–26 so far: 100 bps (from 6.25% to 5.25%)
WHY DID RBI CUT REPO RATE NOW?
The RBI cited two main reasons:
A. Strong economic growth
- India’s economy performed better than expected.
- The RBI increased its GDP growth projection for FY26.
B. Cooling inflation
- Inflation has continued to decline steadily.
- The inflation outlook is now considered benign and well-anchored.
Because of this favourable growth–inflation balance, RBI felt it had policy space to support growth.
IMPACT OF REPO RATE CUT ON COMMON BUSINESSES & PEOPLE
- EMIs are expected to fall on:
- Home loans
- Vehicle loans
- Personal loans
- Corporate loans
- MSME and small business loans
- Lower borrowing costs are expected to:
- Boost consumption.
- Encourage private investment.
- Overall, the move supports a growth-friendly environment.
RBI’S VIEW ON RUPEE DEPRECIATION
- The Indian rupee breached the psychological 90-mark against the US dollar.
- RBI Governor stated that:
- RBI does not target any specific exchange rate level.
- Currency value is determined by market forces.
Important clarification:
- RBI intervenes only to prevent excessive or abnormal volatility, not to fix a rate.
- The rupee closed at ₹89.95 per dollar, compared to ₹89.89 the previous day.
RBI on forex market intervention
- The Governor stated that there has been no change in RBI’s tolerance to volatility.
- RBI continues to follow a market-determined exchange rate regime.
Liquidity measures announced by RBI
- To ensure adequate liquidity in the financial system, RBI announced:
Open Market Operations (OMO)
- Purchase of government securities worth ₹1 lakh crore.
USD/INR Buy–Sell Swap
- Three-year swap worth USD 5 billion.
- Aimed at injecting durable liquidity.
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