Context:
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points (bps) to 5.25%, aiming to lower borrowing costs and support economic growth amid a phase of easing inflation and resilient GDP growth.
Key Highlights:
Monetary Policy Decision
- Repo Rate reduced by 25 bps to 5.25%.
- This marks the fourth consecutive rate cut, amounting to a cumulative reduction of 125 bps.
- Policy stance retained as Neutral, allowing flexibility for future action.
Inflation and Growth Dynamics
- Average headline inflation for the quarter declined to 1.7%, breaching the lower tolerance band of 2% under the 4% inflation target framework.
- Rapid disinflation observed since October, with inflation touching 0.3% in October 2025.
- GDP growth accelerated to 8.2% in Q2, reflecting strong domestic demand and investment momentum.
Liquidity Adjustment Measures
- Standing Deposit Facility (SDF) rate adjusted to 5.0%.
- Marginal Standing Facility (MSF) rate and Bank Rate set at 5.5%.
Significance and Implications
- Expected to lead to cheaper loans for households and businesses.
- Enhances credit flow, supporting consumption and private investment.
- Signals RBI’s confidence in benign inflation outlook while cautiously supporting growth.
Relevant Prelims Points:
- Issue: Monetary easing to stimulate growth amid subdued inflation.
- Causes: Sharp decline in inflation, stable macroeconomic indicators, and need to sustain growth momentum.
- Government/RBI Initiatives: Flexible Inflation Targeting (FIT) framework; accommodative liquidity management.
- Benefits: Lower EMIs, increased borrowing, boost to housing, MSMEs, and capex.
- Challenges: Risk of future inflation resurgence, external shocks, and global monetary tightening.
- Impact: Improved transmission of monetary policy, support to domestic demand, and financial stability.
Relevant Mains Points:
- Key Facts & Provisions:
- Repo Rate: Rate at which RBI lends short-term funds to banks.
- Inflation Target: 4% ± 2% under FIT framework.
- MPC: Statutory body under RBI Act, 1934.
- Keywords & Concepts: Monetary easing, neutral stance, disinflation, policy transmission, growth-inflation trade-off.
- Static Linkages: Role of RBI in macroeconomic stabilization; impact of interest rates on savings and investment.
- Way Forward:
- Strengthen rate transmission to end borrowers.
- Maintain data-driven policy flexibility amid global uncertainties.
- Complement monetary easing with fiscal reforms and structural measures to ensure sustainable growth.
UPSC Relevance (GS-wise):
- GS Paper III: Indian Economy – Monetary Policy, Inflation Management, Growth and Development
- Prelims: Economic terms, RBI functions, inflation targeting framework