Monetary policy: RBI cuts repo rate by 50 bps, reverses stance to 'neutral' | Current Affairs | Vision IAS

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Monetary policy: RBI cuts repo rate by 50 bps, reverses stance to 'neutral'

2 min read

Monetary Policy Committee (MPC) Decisions and Implications

Repo Rate Cut

  • The Reserve Bank of India's MPC cut the repo rate by 50 basis points to 5.5%, surprising markets that expected a 25 bps cut.
  • The decision aimed at faster transmission of policy rate to lending and deposit rates.
  • Bond markets initially welcomed the move, but the excitement was short-lived due to a change in policy stance.

Policy Stance Shift

  • The RBI shifted its stance from accommodative to neutral, citing limited scope for further easing.
  • The switch was partly aimed at signaling the end of the current easing cycle.

Cash Reserve Ratio (CRR) Reduction

  • A staggered 100-bp reduction in CRR was announced, reducing it to 3% of banks' net demand and time liabilities.

Economic Growth and Inflation

  • RBI Governor Sanjay Malhotra emphasized the need to stimulate domestic consumption and investment to boost growth.
  • Inflation forecast for the financial year revised to 3.7%, down from 4%.
  • The GDP growth forecast for FY26 remains at 6.5%.

Impact on Banks and Loans

  • Frontloaded rate cuts expected to lower lending rates on retail products like home and auto loans, affecting banks' net interest margins.
  • The CRR cut aims to offset pressure on banks by releasing ₹2.5 trillion in liquidity, improving margins by an estimated 7 bps.

Future Outlook and Risks

  • Further rate cuts are unlikely in the short term given the policy stance shift to neutral.
  • RBI to assess incoming data and growth-inflation balance for future policy direction.
  • Economists warn of potential asset price inflation if liquidity infusion isn't absorbed by the real economy.

Overall, the RBI's recent monetary policy actions reflect a balancing act between supporting economic growth and managing inflation expectations.

  • Tags :
  • Monetary Policy
  • Repo Rate
  • R.B.I.
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