RBI cuts repo rate

Why in news?

• The Monetary Policy Committee (MPC) of the Reserve Bank of India has cut the repo rate by 25 basis points for the second consecutive time to 6%.
  • The SDF rate has been fixed at 5.75% and the MSF and bank rate at 6.25%.
• Earlier, the repo rate was also cut by 25 basis points in February 2025, which was the first cut since May 2020.

Reasons for the cut in repo rate by the Reserve Bank of India (RBI):

• Decline in food inflation - it stood at 3.8% in February 2025, the lowest in the last 21 months.
• Core inflation (which is measured excluding volatile food and energy prices) is also at 4.1%, which is considered under control.
• This indicates that general inflation is not under pressure, which creates scope for rate cuts.
• RBI's goal is to maintain CPI inflation within 4% ± 2%.
• With current and projected inflation being within this range, RBI adopted a "Growth-supportive stance".
• Many advanced economies have also adopted a policy of cutting or stabilizing interest rates.

Effects of policy rate cuts:

• Cheaper loans: Borrowing becomes cheaper.
• Growth stimulus: Economic activity gets a boost.
• Increase in demand: Consumer spending may increase.
• Investment attractiveness: Stock market and business investment may increase.
• Inflation risk: Prices may rise in the future.