Repo Rate Reduction
Context: RBI cut the repo rate by 50 bps to 5.50% in June 2025, marking the third consecutive cut since February to boost growth amid low inflation.
Important Pointers:
Repo Rate: Interest rate at which commercial banks borrow short-term funds from the central bank against securities.
Purpose & Functioning: Enables banks to meet short-term liquidity needs by borrowing with collateral and repurchasing at a higher price.
Impact on Borrowing Costs: Higher repo rate → costlier loans and slower spending; lower repo rate → cheaper loans and increased borrowing.
Role in Monetary Policy: Tool used by RBI to regulate money supply, inflation, and economic growth.
Impact of Repo Rate Reduction:
Economic Growth: Repo rate cuts lower borrowing costs, encouraging business expansion and job creation.
Borrowing & Spending: Reduced repo rate lowers loan interest and EMIs, boosting borrowing and consumer spending.
Financial Markets: Lower rates may reduce bank deposit returns, pushing savers towards stocks, mutual funds, or real estate.
Export Competitiveness: Repo cuts can weaken currency by causing capital outflows, increasing import costs but improving exports.
Inflation Risk: Increased spending from rate cuts may raise inflation, risking a breach of RBI’s 4% target (±2% band).