UPSC CURRENT AFFAIRS – 10th April 2025
RBI slashes repo- rate
Why in News?
RBI reduced the repo rate by 25 basis points (bps), bringing it down to 6 percent, marks the second consecutive rate cut by the RBI’s six-member MPC, indicating a shift in monetary policy stance from neutral to accommodative.
Role of RBI and MPC
- RBI is India’s central bank and monetary authority responsible for managing inflation and promoting economic growth.
- The Monetary Policy Committee (MPC) is a six-member statutory body under the RBI Act, 1934 (amended in 2016).
- MPC includes 3 RBI officials (including the Governor) and 3 government-appointed external members.
- The MPC decides on the policy repo rate to achieve inflation targeting under India’s Flexible Inflation Targeting Framework.
Repo Rate and Related Rates
🔹 Repo Rate
- The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term money to commercial banks against government securities.
It is a key tool of monetary policy used to control liquidity, inflation, and economic growth. - Current (April 2025): 6.00% (down from 6.25%).
🔹 Reverse Repo Rate
- The reverse repo rate is the rate at which banks park excess funds with the RBI.
It helps RBI absorb excess liquidity from the banking system. - Typically kept lower than the repo rate to maintain the liquidity adjustment facility (LAF) corridor.
- Implied range (April 2025): 3.35%–3.75% (exact value not specified).
🔹 Standing Deposit Facility (SDF) Rate
- The SDF rate is the floor of the LAF corridor, introduced to absorb liquidity without collateral.
- Usually 25 basis points below the repo rate.
- Implied SDF rate (April 2025): ~5.75%.
🔹 Marginal Standing Facility (MSF) Rate
- The MSF rate is the rate at which banks can borrow overnight funds from the RBI above their SLR limit in emergency situations.
It acts as a ceiling for the interest rate corridor. - Typically, 25 basis points above the repo rate.
- Implied MSF rate (April 2025): ~6.25%.
🔹 Bank Rate
- The bank rate is the long-term rate at which RBI lends to commercial banks without repurchase agreements (collateral).
It aligns with the MSF rate and serves as a penal rate in some regulatory frameworks. - Implied Bank Rate (April 2025): ~6.25%.
🔹 Repo-Linked Benchmark Lending Rate (RBLR)
- RBLR is the external benchmark-linked interest rate for loans that are directly tied to the repo rate.
- It ensures faster and transparent transmission of monetary policy to borrowers.
- With a 25-bps repo rate cut, RBLR-linked loans will become cheaper by 25 bps.
🔹 Marginal Cost of Funds-based Lending Rate (MCLR)
- MCLR is the internal benchmark lending rate based on a bank’s own cost of funds, CRR, and operating costs.
- Transmission of repo rate changes is slower and less direct in this system.
- Expected to decrease gradually but not necessarily by the full 25 bps
Inflation and Growth Projections
- GDP growth forecast for FY 2025–26 has been revised down to 6.5% from 6.7%.
- Retail (CPI) inflation projected at 4% for FY 2025–26.
- January–February 2025 inflation tracked at 3.9%, below RBI’s Q4 estimate of 4.8%.
Reasons for the Rate Cut
- Global economic uncertainty, including renewed trade tensions due to reciprocal tariffs by the US.
- Falling domestic inflation has provided room for monetary easing.
- Concerns about slowing domestic and global growth have pushed RBI toward a pro-growth approach.
Impact of the Rate Cut
- Borrowers: EMI on home, auto, and personal loans to fall for those on RBLR-linked loans.
- Banks: Cheaper borrowing from RBI, but profit margins may shrink if deposit rates don’t fall proportionately.
- Depositors: Likely decline in fixed deposit interest rates.
- Consumers & Industry: Boost in demand, private consumption, and investment.
- Economy: Intended to stimulate economic activity amid sluggish global outlook.
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