First Repo Rate Cut In 5 Years: RBI MPC Meeting

1. The Reserve Bank of India (RBI) reduced the repo rate by 25 basis points (0.25%) to 6.25% on February 7, 2025.
2. The repo rate was previously at 6.5%.
3. This is the first repo rate cut in five years, with the previous reduction being in May 2020.
4. The decision was made by the Monetary Policy Committee (MPC), with all members agreeing on the move.
5. Objective: To stimulate economic growth by making borrowing cheaper, thus encouraging spending and investment.
6. While the repo rate was reduced, the RBI maintained its neutral stance.
7. The neutral stance allows flexibility to respond to evolving macroeconomic conditions and remains focused on both growth and inflation.

Repo Rate: The interest rate at which the central bank (RBI) lends money to commercial banks. A reduction in the repo rate makes borrowing cheaper, encouraging economic activity. Fiscal Year (FY): A 12-month period used for calculating annual financial statements in businesses and governments. In India, the fiscal year runs from April 1 to March 31.

GDP Growth Projections:

1. The RBI estimates a GDP growth of 6.7% for the fiscal year 2025-26.
2. The government's Economic Survey projects a similar growth range of 6.3%-6.8% for FY26, showing factors like strong external accounts and stable private consumption.
3. India’s current fiscal year (2024-25) is expected to grow at 6.4%, the slowest rate in 4 years.

Inflation Outlook:

1. RBI projected retail inflation to be 4.2% in FY26, with a quarterly breakdown:
   • Q1: 4.5%
   • Q2: 4%
   • Q3: 3.8%
   • Q4: 4.2%
2. For 2024-25, the inflation forecast remains 4.8%.
3. CPI inflation for December 2024 came in at 5.22%, marking a decline from 5.48% in November 2024.
4. The MPC noted that inflation is moderating, supported by a favorable food outlook and past monetary policy actions.

Inflation: The rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. Retail Inflation: The measure of inflation based on consumer prices, calculated using the Consumer Price Index (CPI). CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Impact of Repo Rate Cut:

1. Loan EMIs: The reduction in repo rate will lower Equated Monthly Installments (EMIs) for borrowers as lending rates linked to the repo rate decrease.
2. Lenders might also adjust interest rates on loans linked to MCLR (Marginal Cost of Funds-based Lending Rate).

Cyber Fraud Prevention Measures:

1. Given the increasing digitalisation of financial services, the RBI is taking steps to curb cyber frauds:
   1. Additional authentication for online international payments to offshore merchants.
   2. Implementation of “.bank.in” domains for Indian banks and “.fin.in” for the rest of the financial sector to enhance digital security.

Forex Market and Exchange Rate Policy:

1. The RBI clarified its position on the forex market:

2. The Indian rupee's exchange rate is determined by market forces, and the RBI intervenes only to smoothen excessive volatility.

3. RBI's intervention in the forex market aims to stabilize the rupee, not to target any specific exchange rate level.

Global Economic Outlook:

1. Global growth is currently below historic averages, with rising concerns over services price inflation stalling global disinflation.
2. The US dollar has strengthened, and emerging market economies are experiencing capital outflows and currency depreciation.

3. Global risks: Geopolitical tensions, trade uncertainties, and the diverging monetary policies of advanced economies are exacerbating financial market volatility.

What is the Monetary Policy Committee (MPC)? The Monetary Policy Committee (MPC) is a 6-member body responsible for setting India's monetary policy. Its primary objective is to maintain price stability while keeping in mind the objective of growth.  Composition: Governor of the Reserve Bank of India (RBI) - Chairperson, ex officio  Deputy Governor of the Bank in charge of monetary policy  Executive Director of the Bank in charge of monetary policy 3 external members nominated by the government of India  Responsibilities: Setting the repo rate, the rate at which the RBI lends to other banks. This rate influences other interest rates in the economy.  Publishing a monetary policy statement after each meeting, explaining their decisions and rationale.  Meetings: The MPC meets at least four times a year.  Decision Making: Decisions are taken by a majority vote. The Governor has a casting vote in case of a tie.  Current Mandate: The current mandate of the MPC is to maintain 4% annual inflation until 31 March 2026 with an upper tolerance of 6% and a lower tolerance of 2%.

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