RBI Announces Major Monetary Easing: Repo Rate Cut by 50 BPS, CRR Slashed by 1%
The RBI's Monetary Policy Committee announced significant easing measures, cutting the repo rate by 50 basis points to a three-year low of 5.5%. Additionally, the Cash Reserve Ratio (CRR) will be slashed by 1% to 3% in four tranches by November 2025, aiming to inject Rs 2.5 lakh crore liquidity into the banking system. These moves are intended to support economic growth and ease borrowing costs.
Unpacked:
The RBI acted because recent GDP data showed weakness in manufacturing and consumption, and inflation has stayed below the 4% target. Slower-than-expected growth and subdued inflation gave the central bank room to ease policy aggressively to stimulate economic activity and support lending.
Cutting the repo rate reduces borrowing costs for banks, which can translate into lower interest rates on loans for individuals and businesses. The CRR cut injects more liquidity, encouraging banks to lend more freely. This could boost investment, spending, and overall economic growth, potentially benefiting consumers and businesses.
Risks include the possibility of excess liquidity fueling asset bubbles or inflation if demand rebounds strongly. Additionally, if banks do not pass on the benefits to borrowers or if economic uncertainty persists, the impact may be limited. The RBI has shifted to a 'neutral' stance, indicating caution about further moves.
Markets responded positively, with Nifty Bank and Sensex both surging after the announcement, reflecting optimism about increased liquidity and lower borrowing costs. Analysts noted that the cuts exceeded expectations, and India Inc welcomed the measures as a significant boost amid growth concerns.