Economy & BudgetImportant2025-04-09

RBI MPC Cuts Repo Rate to 6.00%

Q: Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC) and its policy tools?

C) Both 1 and 2 — Statement 1 is correct; the MPC is a statutory six-member body (3 RBI officials, 3 external members) tasked with determining the policy rate to achieve the inflation target. Statement 2 is correct; an 'accommodative' stance means the central bank is prepared to cut interest rates and expand the money supply to foster economic growth.

In News

What Happened

On April 9, 2025, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), headed by Governor Sanjay Malhotra, reduced the benchmark repo rate by 25 basis points to 6.00%. The committee voted to maintain an accommodative monetary policy stance. This decision was made because the inflation outlook remained benign and aligned with the 4% statutory target despite global trade uncertainties.

Why It Matters

A reduction in the repo rate lowers the cost of funds for commercial banks, which typically translates to cheaper home, auto, and corporate loans. This move is crucial for India as it aims to stimulate domestic consumption and boost private investment to sustain economic growth amidst a challenging global economic environment.

Background

History & Context

The Monetary Policy Committee (MPC) was established in 2016 by amending the RBI Act, 1934, replacing the older system where the RBI Governor had absolute power over interest rates. The six-member MPC is mandated to keep Consumer Price Index (CPI) inflation at 4%, with a tolerance band of +/- 2%. Under former Governor Shaktikanta Das, the RBI maintained a 'withdrawal of accommodation' stance to fight post-pandemic inflation, but under Governor Sanjay Malhotra, the central bank has shifted toward easing rates to support economic expansion as inflation stabilized.

What Changed

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Benchmark Repo Rate: BEFORE this policy announcement, the repo rate was at 6.25%; NOW it has been officially reduced to 6.00%.
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Monetary Policy Stance: BEFORE the easing cycle, the RBI maintained a tight 'withdrawal of accommodation' stance; NOW the committee explicitly maintains an 'accommodative' stance to prioritize growth.
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Cost of Borrowing: BEFORE the cut, retail and MSME loans linked to the external benchmark lending rate (EBLR) were marginally more expensive; NOW these loans will become cheaper, providing EMI relief to borrowers.

Prelims Angle

NCERT Connection

This event directly connects to Class 12 Macroeconomics Chapter 3 — Money and Banking. The chapter outlines quantitative instruments of monetary policy, specifically explaining how the central bank uses the 'Repo Rate' (the rate at which it lends short-term money to commercial banks) to inject liquidity and influence aggregate demand in the economy.

Practice Questions

Q1

Correct Statement(s)

Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC) and its policy tools?

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