RBI Drops a Bombshell! Key Interest Rate Slashed Again – What It Means for Your Money!

The Reserve Bank of India (RBI) has announced a significant monetary policy easing, cutting the key lending rate, the repo rate, by 25 basis points to 5.25%. This marks the fourth reduction in the current year, bringing the cumulative rate cuts for 2025 to 125 basis points. The decision was made following the Monetary Policy Committee's (MPC) three-day meeting.

RBI Cuts Key Lending Rate

• The Monetary Policy Committee (MPC) unanimously voted to reduce the policy repo rate from 5.5% to 5.25% with immediate effect.
• This brings the total rate reductions in 2025 to 125 basis points, signalling an accommodative monetary stance.
• Alongside the repo rate cut, the Standing Deposit Facility (SDF) rate has been adjusted to 5%, and the Marginal Standing Facility (MSF) rate and bank rate now stand at 5.5%.
• The central bank has retained its neutral monetary policy stance.

Economic Rationale

• RBI Governor Sanjay Malhotra stated that the decision was driven by easing inflation and steady economic growth, which provide room to support economic activity.
• The MPC reviewed fresh data on inflation and growth trends before unanimously agreeing on the rate cut.
• This policy aims to foster economic momentum by making borrowing cheaper for businesses and consumers.

Inflation and Growth Forecasts

• Governor Malhotra noted that the inflation outlook has improved significantly, with headline inflation likely to be softer than earlier projections due to exceptionally benign prices.
• Both headline and core inflation are expected to remain at or below 4% in the first half of the next year.
• The rise in precious metal prices alone contributed about 50 basis points to headline inflation, suggesting underlying inflationary pressures are even lower.
• On the growth front, the economy is expected to remain resilient, though some moderation is anticipated.

Liquidity Management Measures

• To ensure market stability and manage liquidity conditions, the RBI will conduct Open Market Operations (OMO) purchases of government securities amounting to Rs 1 lakh crore.
• A three-year dollar-rupee buy-sell swap of 5 billion US dollars is also scheduled for December to inject durable liquidity into the system.

Impact

• This rate cut is expected to lower borrowing costs for businesses and individuals, potentially stimulating investment, consumption, and overall economic activity.
• The move could boost investor sentiment and encourage capital expenditure, contributing to sustained economic growth.
• The RBI's action aims to strike a balance between supporting growth momentum and maintaining inflation within its target.
• Impact Rating: 8/10

Difficult Terms Explained

• Repo Rate: The interest rate at which the Reserve Bank of India lends money to commercial banks. A cut in the repo rate typically leads to lower borrowing costs across the economy.
• Basis Points: A unit of measure used in finance to describe small percentage changes. 100 basis points equal 1 percent.
• Monetary Policy Committee (MPC): A committee responsible for setting the benchmark interest rate (repo rate) in India.
• Standing Deposit Facility (SDF): A facility where banks can deposit surplus funds with the RBI and earn interest, acting as a floor for short-term interest rates.
• Marginal Standing Facility (MSF): A facility allowing banks to borrow overnight funds from the RBI against eligible securities at a rate higher than the repo rate.
• Open Market Operations (OMO): The RBI's buying and selling of government securities in the open market to manage money supply and liquidity in the economy.
• Dollar Rupee Buy-Sell Swap: A foreign exchange transaction where the RBI enters into a contract to buy dollars spot and sell them forward, or vice versa, to manage liquidity and exchange rates.
• Headline Inflation: A measure of inflation that includes all components of the economy, providing an overall picture of price changes.
• Core Inflation: A measure of inflation that excludes volatile items like food and energy, offering insight into underlying price trends.