RBI cuts Repo Rate

The Reserve Bank of India (RBI) has reduced the repo rate by 50 basis points, bringing it down from 6.5% to 6.0%. Alongside this, the Monetary Policy Committee (MPC) has changed its policy stance from “withdrawal of accommodation” to “neutral”, signalling a shift in the central bank’s monetary approach for the coming quarters.

Reasons for Repo Rate Cut by RBI (June 2025):

  1. Declining Inflation:
    • CPI inflation has consistently decreased over the past four months.
    • In May 2025, it stood at 82%, well within the RBI’s target range (2–6%).
    • This created policy space to shift focus from inflation control to growth revival.
  2. Weak Private Consumption:
    • Post-COVID recovery remains uneven.
    • Rural demand is still subdued due to high inflation during 2022–24.
    • Households remain cautious in spending.
  3. Stagnant Private Investment:
    • MSMEs and small businesses face high borrowing costs.
    • Lowering repo aims to stimulate credit flow, production, and job creation.
  4. Global Monetary Trends:
    • Major central banks (e.g., US Fed) have started cutting rates.
    • India’s move aligns with the global easing cycle and supports export competitiveness.

Understanding the Repo Rate and Its Role in the Economy

The repo rate is the interest rate at which the RBI lends money to commercial banks, typically in exchange for government securities. It is the primary tool through which the central bank controls short-term liquidity in the economy.

When the repo rate is lowered:

  • Borrowing becomes cheaper for banks.
  • Banks, in turn, pass on this benefit to customers through lower loan interest rates.
  • This encourages both consumers and businesses to take loans, spend more, and invest more.

Thus, cutting the repo rate is a classic example of using monetary policy to boost aggregate demand.

What makes this cut Significant?

The 50 bps rate cut, the largest since COVID-19, signals RBI’s strong intent to boost growth. The shift to a “neutral” stance adds flexibility, allowing data-driven decisions in response to inflation or demand shifts. It reflects a cautious, adaptive approach amid uncertain global and domestic economic conditions

Expected Impact on the Economy

The repo rate cut will have widespread ripple effects across different sectors:

  • Banking and Lending: Loans for housing, vehicles, and personal consumption are expected to become cheaper. This may also revive demand in segments like real estate and consumer durables.
  • MSMEs and Businesses: Lower interest costs could encourage businesses, particularly small enterprises, to expand operations or increase hiring.
  • Bond Market: Bond yields may fall, as lower interest rates increase the attractiveness of existing government securities.
  • Stock Market: Investor sentiment is likely to be buoyed, especially in interest rate-sensitive sectors such as banking, auto, and real estate.
  • Consumers: The move may provide relief to households through lower EMIs, thereby improving disposable incomes and household spending.
Accommodative Policy of MPC Monetary Policy Committee (MPC)