RBI Lowers Repo Rate to Boost Economic Growth

RBI's Decision to Cut Repo Rate

Mumbai, Dec 5: RBI Governor Sanjay Malhotra revealed on Friday that the monetary policy committee (MPC) has reached a unanimous decision to lower the repo rate by 25 basis points, bringing it down to 5.25% from the previous 5.5%. This move aims to stimulate economic growth.

Additionally, the RBI plans to enhance liquidity in the economy by conducting open market operations, which will involve purchasing government securities worth Rs 1 lakh crore. Furthermore, a dollar-rupee swap arrangement of $5 billion will also be established.

Malhotra highlighted that the economy experienced a remarkable growth rate of 8.2% in the second quarter of the current fiscal year, alongside a significant drop in inflation to 1.7%. This scenario has created a unique 'Goldilocks period' for India’s economy.

He noted that the favorable inflation rate has provided the necessary space for a repo rate reduction to foster growth. The RBI has also revised its GDP growth forecast for the country to 7.3%, up from the earlier estimate of 6.8%.

Moreover, Malhotra confirmed that the RBI will maintain a 'neutral policy stance.' This approach aims to balance liquidity control without hindering growth, as the RBI continues to monitor the effects of previous monetary policy adjustments and the evolving trade landscape.

The RBI Governor also mentioned that the nation’s foreign exchange reserves have reached an impressive $686 billion, which is adequate to cover imports for 11 months.

However, he cautioned that ongoing geopolitical tensions and uncertainties in global trade pose risks to the economy.

Last week, the RBI Governor indicated that there was potential for a repo rate cut during the monetary policy review on December 5, supported by positive macroeconomic indicators.

In the previous two reviews held in August and October, the MPC had opted to keep the repo rate unchanged to manage inflation effectively.

Prior to this, the RBI had reduced the repo rate by 100 basis points from 6.5% to 5.5% in a swift manner between February and June, with the effects still being felt in the economy.

A reduction in the policy rate, coupled with increased liquidity for banks, typically leads to lower interest rates on loans, facilitating easier borrowing for both consumers and businesses. This, in turn, encourages higher consumption and investment, driving economic growth.

Nonetheless, the success of the rate cut will depend on how promptly and effectively commercial banks relay these benefits to their borrowers.