The Reserve Bank of India (RBI) has made significant adjustments to its monetary policy by cutting the policy repo rate by 50 basis points, bringing it down to 5.5%. Furthermore, the RBI plans to reduce the cash reserve ratio (CRR) by 100 basis points, implementing this reduction in a staggered manner throughout 2025, ultimately reaching 3% of demand and time liabilities.
The primary motive for the RBI's decision to lower the repo rate and CRR is to stimulate economic growth. With inflation now under control, the RBI aims to inject additional primary liquidity into the banking system. This strategy is expected to lower borrowing costs for both businesses and households, thereby encouraging credit demand, investment, and consumption.
The reduction of the CRR will occur in four phases, each involving a 25 basis point cut. The effective dates for these reductions are set for September 6, October 4, November 1, and November 29. This gradual approach will decrease the proportion of deposits that banks are required to hold in reserve with the central bank.
These measures are anticipated to release approximately ₹2.5 lakh crore of primary liquidity into the banking system by December 2025. This influx of liquidity will enhance banks' lending capacity and reduce their funding costs.
The RBI has revised its inflation forecast for 2025-26 down to 3.7%, compared to the previous estimate of 4%. Additionally, the projected GDP growth for the same period stands at 6.5%. The RBI believes that private consumption, fixed capital investment, and rural economic activities will drive this growth.
The RBI's Monetary Policy Committee (MPC) is shifting from an accommodative stance to a neutral one. This change follows a series of repo rate cuts aimed at addressing slowing economic growth. By adopting a neutral position, the RBI gains the flexibility to raise rates if inflationary pressures arise again, thus balancing growth with price stability amid changing global economic conditions.
The cuts to the policy rate and CRR are crucial for enhancing credit flow, supporting economic recovery, and sustaining investment and consumption momentum. The phased approach to the CRR reduction also aims to maintain stability in money markets while providing banks with increased funds for lending. By transitioning to a neutral stance, the RBI demonstrates its readiness to adapt to evolving growth and inflation trends, ensuring long-term monetary stability.
Q1. What is the repo rate cut announced by the RBI?
Answer: The RBI has cut the repo rate by 50 basis points to 5.5% as part of its monetary policy adjustments aimed at stimulating economic growth.
Q2. How will the CRR be reduced?
Answer: The CRR will be reduced in four phases, with each cut being 25 basis points, effective on specified dates in September and October 2025.
Q3. What is the expected impact of the liquidity release?
Answer: The liquidity release of around ₹2.5 lakh crore is expected to enhance banks' lending capacity and lower borrowing costs for consumers and businesses.
Q4. Why is the RBI moving to a neutral stance?
Answer: The RBI is shifting to a neutral stance to maintain flexibility in response to potential inflation pressures while balancing growth and price stability.
Q5. What are the growth projections for 2025-26?
Answer: The RBI projects GDP growth at 6.5% for 2025-26, supported by factors like private consumption and rural economic activity.
Question 1: What is the new repo rate set by the RBI?
A) 5.0%
B) 5.5%
C) 6.0%
D) 4.5%
Correct Answer: B
Question 2: How much liquidity is expected to be released due to the CRR cut?
A) ₹1 lakh crore
B) ₹2 lakh crore
C) ₹2.5 lakh crore
D) ₹3 lakh crore
Correct Answer: C
Question 3: What is the projected inflation rate for 2025-26?
A) 4%
B) 3.5%
C) 3.7%
D) 4.5%
Correct Answer: C
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