Little pro RBI cuts repo rate by 0.25 %, trims GDP growth forecast

Context

• The Reserve Bank of India slashed the repo rate by 25 basis points to 6% on Wednesday, with its Monetary Policy Committee voting unanimously to reduce the policy rate in a bid to support growth and bring down the interest burden on home, auto, and other loan borrowers. However, this will also reduce the interest earned on savings by depositors.

• The move comes against the backdrop of an escalating global trade war, triggered by U.S. President Donald Trump’s wide-ranging tariffs. The MPC has also lowered its forecast for India’s GDP growth this year, from 6.7% to 6.5%.

• This is the second time in a row that the MPC has cut the repo rate by 25 basis points (bps) or 0.25%. The committee, headed by RBI Governor Sanjay Malhotra, also unanimously shifted its policy stance from neutral to accommodative, indicating that it is more worried that economic growth could be a casualty of the trade war, than about inflation.

• This is a policy stance “geared towards stimulating the economy through softer interest rates,” Mr. Malhotra said, signalling the likelihood of further rate cuts.

• “Uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households,” he said, in a monetary statement explaining the situation. “Second, the dent on global growth due to trade friction will impede domestic growth. Third, higher tariffs shall have a negative impact on our exports,” he said.

What is Repo Rate?

Repo rate(Repurchase Agreement Rate)is theinterest rateat which commercial banksborrow moneyfrom the central bank

Purpose & Functioning:It helps banksmeet short-term liquidity needsby borrowing funds

Banks providesecurities as collateraland agree to repurchase them later at a higher price (including interest)

Impact on Borrowing Costs:

Higher repo rate→ Costlier loans for banks →Higher interest rates for consumers & businesses→ Slower borrowing & spending

Lower repo rate→ Cheaper loans for banks →Lower interest rates for borrowers→ Increased borrowing & spending

Role in Monetary Policy:It is used by the central bank tocontrol money supply, inflation, and economic growth