Loan EMIs To Become Less? RBI Reduces Repo Rate After Five Years

The six-member Monetary Policy Committee (MPC) of India’s apex bank, the Reserve Bank of India (RBI) has reduced the key policy rate by 25 basis points (bps) to 6.25 per cent. The repo rate has been at 6.50 per cent for two years. Notably, the cut in repo rate is for the first time in the past 5 years.

The good thing is this decision will result in a fall in interest rates and equated monthly instalments (EMIs) on home and personal loans.

Why is there a cut in the Repo rate?

The main aim of lowering the Repo rate is to stimulate economic growth. With a lower rate, borrowing would become cheaper for individuals as well as for businesses. This may lead to increased spending and investment. The inflation in India is reportedly within RBI’s target range and a repo rate cut can help maintain price stability while supporting growth.

Repo rate is the interest at which RBI lends money to commercial banks. Lowering this rate will simultaneously lower the rate of interest in commercial banks from where people take loans. This will attract more people to take loans and investments thus stimulating economic growth. 

The repo rate cut of 25 basis points will bring down the interest rate in the percentage term to 6.25% from the earlier 6.50%. “The Monetary Policy Committee unanimously decided to reduce the policy rate by 25 basis points from 6.5% to 6.25%”—declared RBI governor Sanjay Malhotra in front of the press.

“Inflation targeting has served the Indian economy very well. Average inflation has remained lower since the introduction of monetary policy framework”—Malhotra added further. On the status of the global financial market condition, the RBI governor said—“ The global economic backdrop remains challenging. The global economy is growing below the historical average, even though high-frequency indicators suggest resilience, along with continued expansion in trade. Progress on global disinflation is stalling, hindered by services price inflation.”

The budget has made a projection of a full-year fiscal deficit of 4.8% of GDP for the current financial year, while it aims to reduce it to 4.4% in 2025-26. How the latest monetary policy decision impacts the  fiscal measures in driving economic recovery and ensuring financial stability will be seen in the coming months