Repo rate is the interest rate at which banks borrow money from the RBI. It is also known as the repurchase agreement rate.
The Repo rate cut follows a consensus decision of the Monetary Policy Committee (MPC) of the RBI which met for three days from February 5.
Consequently, the standing deposit facility (SDF) rate shall be 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate shall be 6.50 per cent.
The standing deposit facility is a collateral-free liquidity absorption mechanism implemented by the RBI with the intention of transferring liquidity out of the commercial banking sector and into the RBI. It enables the RBI to take liquidity (deposits) from commercial banks without having to compensate them with government securities. The SDF, introduced in April 2022, is significant because it was created to give the Reserve Bank the ability to handle unusual circumstances when it must absorb large quantities of liquidity. In the past, the RBI has experienced issues with liquidity absorption due to events such as the global financial crisis and demonetization.
MSF, or Marginal Standing Facility, is a window provided by the Reserve Bank of India (RBI) for banks to borrow overnight funds at a higher interest rate than the repo rate. It helps banks maintain liquidity and meet their short-term funding requirements in times of financial stress.
Significantly enough, the MPC has also chosen to continue with the neutral stance. This, according to RBI Governor Sanjay Malhotra, will give the monetary policy authority the flexibility in terms of response to the evolving macro-economic environment. The RBI governor said that the flexible inflation targeting (FIT) framework had served the Indian economy. well over the years since its introduction in 2016 and review in 2021.
“The average inflation has been lower post the introduction of FIT. Moreover, CPI (consumer price index) inflation has mostly stayed aligned with the target, barring a few occasions of breaching the upper tolerance band since its inception. We will continue to improve the macroeconomic outcomes in the best interest of the economy using the flexibility embedded in the framework while responding to the evolving growth-inflation dynamics,” he said. “The building blocks of the framework will be refined further by making advances in the use of new data, improving forecasting of key macroeconomic variables and developing more robust models,” he added.
The RBI move on the rate front comes close on the heels of a significant income tax reliefs announced in the latest Union Budget. Read against this backdrop, observers see in the rate cut a concerted effort by fiscal and monetary bosses to boost consumption. A co-ordinated action is imperative especially in the context of heightened uncertainty on the global front caused by increasing geo-political tensions, aggressive tariff position taken by U.S. President Donald Trump and the like. “The global economic backdrop remains challenging,” the RBI governor said. “The Indian economy, though continuing to remain strong and resilient, also did not remain immune to these global headwinds, with the Indian rupee coming under depreciation pressure in the recent months. At the Reserve Bank, we have been employing all tools at our disposal to face the multi-pronged challenges,” the governor said.
In the wake of a favourable outlook on food and continuing transmission of past monetary policy actions, the rate-setting committee of the RBI expects inflation to further moderate in 2025-26, gradually aligning with the target. “The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target,” the governor said.
The real GDP (gross domestic product) growth for the current year is estimated at 6.4 per cent, a softer expansion after a robust 8.2 per cent growth last year.” Manufacturing activity is expected to recover gradually in the second-half of this year and beyond,” he added.
The RBI has projected the CPI inflation for the current financial year at 4.8 per cent .
In the inflation-growth trade-off, the apex bank has chosen to support growth by cutting the policy rate.
The governor’s emphasis on the “flexibility” in the inflation target framework, a deviation from the previous assertion of reaching the median target of 4% by the central bank, gives a clue or two to the appreciation of rising concerns over growth. Yet, keeping the neutral stance unchanged indicates a sense of cautiousness in the approach. This could still put some pressure on liquidity conditions.
