Mumbai: The Reserve Bank of India (RBI) on Friday reduced the repo rate by 25 basis points to 6.25%. RBI Governor Sanjay Malhotra announced this after the Monetary Policy Committee (MPC) meeting of the apex bank. This is the first rate cut in nearly five years. This is the first reduction since May 2020, during the Covid pandemic.
Between May 2020 and April 2022, the RBI kept the repo rate steady at 4%. However, since April 2022, the central bank has been gradually increasing the policy rate, which reached 6.5% by February 2023, before maintaining it at that level for two years until now.
Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Usually authorities use this key lending rate as a weapon to combat inflation. If inflation rises, then apex banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.
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The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.
In addition to the repo rate cut, the RBI also reduced the SDF and MSF by 25 basis points, bringing them to 6% and 6.5%, respectively. The bank rate has also been cut to 6.5%.
Governor Malhotra also revealed that the RBI’s rate-setting panel has projected India’s FY26 GDP growth at approximately 6.7%. The inflation target for FY26 has been maintained at 4.2%.
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