RBI Holds Repo Rate at 5.25 per cent

Syllabus: GS3/ Economy

Context

• The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 5.25%.

More in News

• The MPC revised GDP growth for FY26 slightly higher to 7.4% (from 7.3%) and retail inflation to 2.1% (from 2%). 
• Inflation trends remain benign, with CPI inflation projected at 4–4.2% in Q1-Q2 FY27, slightly raised due to precious metal prices, while food price deflation continues to keep overall inflation low.

What is the Repo Rate?

• The repo rate is the rate at which the RBI lends short-term money to commercial banks. It is the key policy tool used by the RBI to control liquidity, inflation, and economic growth.
• A lower repo rate means banks can borrow from the RBI at cheaper rates. This encourages banks to lower lending rates, leading to:
  • Easier access to credit for consumers and businesses
  • Boost in investment, consumption, and economic activity
  • Increased liquidity and money supply
  • This can stimulate growth, especially during economic slowdowns

Reasons Behind the recent Policy Decision

• Resilient Growth Momentum: Real GDP growth remains robust, supported by strong domestic consumption, income tax relief and GST rationalisation, and fiscal measures in the Union Budget.
• External Sector Uncertainties: Rising geopolitical tensions, volatile crude oil prices, and divergence in global monetary policies pose risks to capital flows and exchange rate stability. A pause helps safeguard macroeconomic stability.
• Inflation Within the Target Range: Retail inflation remains within the 2–6% target band, and core inflation is contained limiting the need for immediate policy action.
• Impact of Trade Agreements: India recently signed trade agreements with the United States, the European Union, Oman and New Zealand.
  • These agreements are expected to boost exports and investments, reduce external vulnerabilities, and support medium-term growth.

Impact on the Indian Economy

• Impact on Borrowers and Households: Stable interest rates reduce financial uncertainty for middle-class households and housing loan borrowers.
• Impact on Investment and Credit Growth: Stable interest rates, strong demand conditions, and trade agreements create a predictable environment for private investment.
• Macroeconomic Stability: The decision reinforces the credibility of India’s Flexible Inflation Targeting framework and demonstrates institutional stability in monetary policymaking.

Way Ahead

• Monetary Transmission: Efficient transmission of past rate cuts through the banking system must be ensured so that credit flows effectively to productive sectors.
• Safeguard External Sector Stability: Active liquidity management, prudent forex reserve deployment, and monitoring of global financial conditions are necessary to cushion against external shocks.
• Enhance Fiscal-Monetary Coordination: Continued fiscal consolidation alongside targeted public spending will complement monetary policy and sustain long-term growth without triggering inflationary pressures.

Source: IE