The Reserve Bank of India announced a 25-basis-point reduction in the policy repo rate, bringing it down to 5.25%. Following this adjustment, the standing deposit facility (SDF) rate now stands at 5%, while the marginal standing facility (MSF) rate and the Bank Rate have been revised to 5.5%. The six-member Monetary Policy Committee (MPC) voted unanimously in favour of the rate cut. The central bank has raised its GDP growth projection for FY 2025–26 to 7.3%, an upward revision from the earlier estimate of 6.8%.
What is MPC
- The Monetary Policy Committee (MPC) is a key decision-making body of the Reserve Bank of India responsible for setting the country’s benchmark interest rates, most importantly the repo rate, to maintain price stability and support economic growth.
- Established in 2016 under the amended RBI Act, the MPC consists of six members, three from the RBI, including the Governor as Chairperson, and three external experts appointed by the Government of India.
- The committee meets at least four times a year to assess economic conditions such as inflation, growth trends, liquidity, and global financial developments before voting on policy actions.
- By bringing together diverse expertise and ensuring transparent, structured deliberations, the MPC plays a central role in India’s monetary policy framework, anchoring inflation expectations while fostering a stable financial environment.
Brief explanation of the key policy rates in India:
- Repo Rate: The rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks. It is the primary tool to control inflation—higher repo rates make borrowing costlier, reducing money supply, while lower rates make loans cheaper.
- Reverse Repo Rate: The rate at which commercial banks deposit their excess funds with the RBI. It helps the RBI manage liquidity in the banking system. When the reverse repo rate rises, banks are encouraged to park more money with the RBI.
- Bank Rate: A long-term rate at which RBI lends to banks without any collateral. It is used to regulate long-term credit and influences the overall interest rates in the financial system.
- Marginal Standing Facility (MSF) Rate: A facility that allows banks to borrow overnight funds from RBI against approved securities when they face a shortfall. The MSF rate is higher than the repo rate, acting as a penal rate for urgent borrowing.
- Standing Deposit Facility (SDF) Rate: A tool that allows RBI to absorb excess liquidity from banks without giving collateral in return. It helps manage surplus money in the system and influences short-term interest rates.
- Cash Reserve Ratio (CRR): The percentage of a bank’s total deposits that must be kept with the RBI in cash form. Higher CRR reduces the funds available for lending, tightening liquidity.
- Statutory Liquidity Ratio (SLR): The share of deposits banks must maintain in the form of liquid assets like gold, government securities, or cash. It ensures banks remain financially stable and have enough liquidity to meet obligations.
