Copyright infringement not intended

Picture Courtesy:  THE HINDU

Context:

The Reserve Bank of India (RBI) slashes repo rate and CRR to boost liquidity and support economic growth.

What are the Key Policy Changes?

The RBI's Monetary Policy Committee (MPC) has announced three major changes to stimulate the economy:

• Repo Rate Cut => The MPC has cut the policy repo rate by 50 basis points (0.50%), bringing it down to 5.50%.
• Cash Reserve Ratio (CRR) Cut => The RBI will reduce the CRR by 100 basis points (1%) over the course of this year. This cut will happen in four steps of 25 basis points each, releasing approximately ₹2.5 lakh crore of liquidity into the banking system by December 2025.
• Change in Stance => The policy stance has been shifted from "accommodative" to "neutral."

Key Monetary Policy Tools

Repo Rate => This is the interest rate at which the RBI lends money to commercial banks against government securities. When the RBI cuts the repo rate, it makes borrowing cheaper for banks. The expectation is that banks will, in turn, lower their own lending rates for consumers and businesses. This is a primary tool to influence interest rates and economic activity.

Cash Reserve Ratio (CRR) => This is the percentage of a bank's total deposits that it must mandatorily keep as a cash reserve with the RBI. Banks do not earn any interest on this reserve. By cutting the CRR, the RBI allows banks to hold a smaller portion of their deposits in reserve, thereby freeing up more cash (increasing liquidity) that they can use for lending.

Monetary Policy Stance

Accommodative: This signals that the central bank is prepared to cut interest rates further to boost growth.

Neutral: This signals that the RBI can move in either direction—it can either cut or increase rates depending on how the economic situation evolves. It gives the RBI flexibility without committing to a specific direction.

Rationale Behind the Decisions

The MPC's actions are guided by its dual mandate: maintaining price stability while supporting growth

Reduced Inflation => The primary enabler for this pro-growth stimulus is the cooling of inflation. The RBI has revised its Consumer Price Index (CPI) inflation forecast for the financial year 2025-26 downwards from 4% to 3.7%. With inflation projected to remain within the RBI's tolerance band of 4% (+/- 2%), the MPC found the necessary space to focus on boosting economic growth.

Sustaining Growth Momentum => The RBI has maintained its real GDP growth forecast for 2025-26 at 6.5%. The rate cuts are a pre-emptive measure to ensure this momentum is sustained. The RBI notes that economic activity is supported by strong private consumption and government capital expenditure. A favorable monsoon forecast is also expected to boost rural demand.

Impact of the RBI's Moves  

Must Read Articles: 

Monetary Policy

RBI Cuts Repo Rate, Growth Risks

Source: 

THE HINDU