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Monetary policy in action: - Analysis of 2025 Repo rate cuts and its impact on
Indian economy:
Introduction of Central bank
Reserve Bank of India (RBI) is the central bank and the key regulatory body of the Indian
financial system. RBI was founded on 1st April 1935, under the Reserve Bank of India Act,
1934, and was nationalized in 1949. The RBI is headquartered in Mumbai and acts as the
issuer of currency, foreign exchange reserves custodian, and credit and monetary policy
regulator.
As the highest institution, the RBI assumes a pivotal role in the maintenance of financial and
economic stability in India. Its major functions are:
-Regulating the money supply within the economy to provide sufficient liquidity without
generating inflation.
-Price stability through monetary policy instruments.
-Currency stability as well as the external value of the rupee.
-The supervision and regulation of banks and non-banking financial companies (NBFCs) to
facilitate public confidence in the financial system.
-Overseeing the government's lending program through issuing bonds and serving as the
government's banker.
To carry out these roles, the RBI uses a combination of quantitative instruments (such as the
Repo Rate, Reverse Repo Rate, CRR, and SLR) and qualitative instruments (such as moral
suasion and credit rationing). The Monetary Policy Committee (MPC), established in 2016, is
responsible for setting the policy interest rates, especially the repo rate, to maintain price
stability while keeping the goal of economic growth in mind.
Essentially, the RBI is the custodian of India's monetary well-being, and its policy decisions—
particularly on the repo rate—have significant implications on lending rates, inflation,
investment, and overall economic growth.

Quantitative and Qualitative methods

Monetary policy tools are broadly classified into quantitative and qualitative methods:
Quantitative Methods (General Tools):
1. Repo Rate: The rate at which RBI lends money to commercial banks. A cut in repo
rate makes borrowing cheaper.
2. Reverse Repo Rate: The rate at which RBI borrows from commercial banks.
3. Cash Reserve Ratio (CRR): Percentage of total deposits that banks must keep with
RBI.
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4. Statutory Liquidity Ratio (SLR): Minimum percentage of deposits that banks must
maintain in the form of gold, cash, or approved securities.
5. Open Market Operations (OMO): Buying and selling of government securities to
regulate liquidity.
Qualitative Methods (Selective Tools):
1. Margin Requirements: Regulating the minimum margin for loans to control credit
supply.
2. Moral Suasion: Persuading banks to follow RBI guidelines.
3. Direct Action: RBI may take strict action against banks not following monetary norms.
4. Credit Rationing: Limiting the amount of credit available to specific sectors.

Objectives/Aims about Repo rates

The repo rate (short for repurchase rate) is the rate at which the Reserve Bank of India
(RBI) lends short-term funds to commercial banks against government securities. It is
one of the most powerful tools in the RBI’s monetary policy arsenal and plays a crucial
role in influencing overall economic activity. The main objectives and aims of adjusting
the repo rate are:
1. Controlling Inflation
One of the primary aims of the repo rate is to regulate inflation.
 When inflation rises beyond the RBI’s comfort zone (usually above 4% with a margin
of ±2%), the central bank may increase the repo rate.
 This makes borrowing costlier for commercial banks, which in turn increases interest
rates for loans to businesses and consumers.
 As borrowing becomes expensive, consumption and investment slow down, leading
to a reduction in demand-pull inflation.
2. Boosting Economic Growth
During periods of economic slowdown or recession:
 The RBI may lower the repo rate to make funds cheaper for banks.
 This encourages banks to lend more to businesses and individuals, reducing EMIs and
boosting investment and consumption.
 By increasing the money flow in the economy, the repo rate acts as a stimulus to
economic growth, especially during downturns or after events like a pandemic or
global financial shocks.
3. Ensuring Adequate Liquidity
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Another important goal is to manage liquidity in the banking system:

 During liquidity crunches (shortage of money supply), a lower repo rate enables
banks to borrow more easily from the RBI.
 This ensures that banks have enough funds to meet credit demands from businesses
and households, thus supporting smooth economic activity.
In essence, the repo rate is a strategic lever that allows the RBI to fine-tune the balance
between inflation control, economic growth, liquidity availability, and financial stability
all of which are essential for a healthy and resilient economy.

Parameters (April 2024- 25)

1. Inflation
 India's Consumer Price Index (CPI) inflation fell to 3.16% in April 2025, marking a six-
year low and staying well below the RBI's 4% target.
 The Ministry of Statistics and Programme Implementation (MoSPI) reported a
provisional headline inflation of 2.92% for April 2025.
 This significant decline in inflation provided the RBI with the flexibility to implement
rate cuts to stimulate economic growth.
2. Economic Growth
 India's GDP growth for FY2024-25 slowed to 6.5%, a four-year low, down from 9.2%
in the previous fiscal year.
 However, the fourth quarter (Q4) of FY2024-25 saw a robust growth of 7.4%, driven
by strong performances in the construction and manufacturing sectors.
 The OECD projects India's growth at 6.3% for FY2025-26, indicating sustained
economic momentum despite global uncertainties.
3. Sectoral Impact: Banking and Consumer Spending
 Banking Sector: The RBI's cumulative 50 basis points repo rate cuts in 2025 have led
banks to reduce their lending rates, enhancing credit availability.
 Consumer Spending: Lower interest rates have made loans more affordable, boosting
demand in sectors like housing, automobiles, and consumer durables.
4. Liquidity Measures
 Since January 2025, the RBI has infused over $100 billion into the banking system
through bond purchases and long-term forex swaps to ensure adequate liquidity.
 These measures have supported the transmission of monetary policy and stabilized
financial markets.
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Challenges and Limitations

 Monetary Transmission: Repo rate cuts often face delays in reaching consumers, as
banks may not immediately reduce lending rates due to internal constraints.
 Global Economic Uncertainty: Trade tensions and geopolitical risks, like the U.S.-
China trade war, impact India’s exports and foreign investment.
 Rupee Volatility: The rupee has shown limited appreciation compared to other Asian
currencies, affecting import costs and inflation control.
 Policy Coordination Issues: Lack of alignment between RBI's monetary policy and
government fiscal actions can reduce the effectiveness of rate cuts.
While repo rate adjustments are key to managing growth and inflation, their effectiveness can
be limited by external shocks, delayed transmission, and policy mismatches. A balanced and
coordinated approach is essential for achieving the full benefits of monetary policy.

Current scenario
The Reserve Bank of India (RBI) is anticipated to implement a third consecutive 25 basis
points cut in the repo rate, potentially bringing it down to 5.75%. This move comes in
response to subdued inflation trends and a broader need to revive economic momentum. A
lower repo rate makes borrowing cheaper for businesses and consumers, encouraging
higher spending and investment.
In line with these measures, the RBI continues to maintain an accommodative monetary
policy stance. This means the central bank is prioritizing support for economic growth,
especially in the wake of global uncertainties and domestic demand challenges. At the same
time, the RBI remains cautious to ensure that inflation stays within its target range of 4% ±
2%, maintaining price stability while promoting growth.
By combining rate cuts with a growth-oriented outlook, the RBI aims to strike a delicate
balance between stimulating demand and containing inflationary pressures, especially in
light of ongoing challenges like geopolitical instability, supply chain disruptions, and uneven
sectoral recovery.

Future prospects-India is expected to remain the fastest-growing major economy, with

the IMF projecting growth at 6.2% in 2025 and 6.3% in 2026. This momentum is driven by
strong domestic demand, supportive government policies, and a growing digital economy.
Key reforms and public investments continue to attract both domestic and foreign investors.
The Indian rupee is projected to strengthen to around ₹84 per USD by end-2025, supported
by stable oil prices and a favourable trade deal with the U.S..A stronger rupee helps control
import-driven inflation and boosts investor confidence.
The government's continued push in infrastructure, manufacturing, and the digital economy
is expected to drive long-term growth. Initiatives like ‘Make in India’ and PLI schemes are
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enhancing industrial capacity and job creation while positioning India as a global
manufacturing hub.

Articles
1)This article by The Times of India talks about how the Reserve Bank of India (RBI) has
revised its growth forecast for FY26 to 6.7%, up from the previous estimate of 6.4%. This
adjustment reflects expectations of improved employment conditions, tax relief measures,
moderating inflation, and healthy agricultural activity, which are anticipated to support
household consumption. However, the RBI also cautioned about global risks, including
geopolitical tensions and trade uncertainties, which could impact the growth trajectory
2)Another article by The Times of India talks about how the RBI expressed confidence in
maintaining inflation below its medium-term target of 4% into FY26. This optimism stems
from inflation levels falling below the 4% mark in both February and March of 2025. The
central bank's positive outlook suggests that there may be greater room to support
economic growth, reflecting a balanced approach toward inflation management and
economic expansion.
3)This article by Reuters discusses how India's economy grew by 7.4% year-on-year in the
January-March 2025 quarter, surpassing analyst expectations of 6.7% and marking the
highest quarterly growth since early 2024. Key drivers of this expansion were the
construction and manufacturing sectors. For the entire fiscal year, GDP growth was reported
at 6.5%, making India the fastest-growing major economy globally. Economists highlighted
factors such as a boost from net indirect taxes, catch-up in government spending, and robust
public capital expenditure. However, concerns remain about the sustainability of
investment-led growth, with limited private sector participation and global trade
uncertainties posing risks.

My Opinion
In my view, for monetary policy to have its intended impact, there is a strong need to
enhance monetary transmission. The RBI’s rate cuts should be more effectively passed on to
consumers and businesses through lower lending rates by banks. Often, the delay in this
transmission weakens the policy's impact on the ground.
At the same time, India should aim to diversify its economic drivers. Relying heavily on a few
key sectors makes the economy vulnerable to global disruptions. By encouraging growth in
manufacturing, services, and emerging industries, India can build a more resilient and
balanced economy.
Another important step is to strengthen coordination between fiscal and monetary policy. A
more cohesive approach between the government and the RBI can help tackle economic
challenges more effectively, especially during times of uncertainty.
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Lastly, a long-term strategy must include investment in human capital. By increasing

spending on education, skill development, and vocational training, we can prepare India’s
large workforce for future challenges and opportunities in a rapidly evolving global economy.
These steps, in my opinion, are essential to ensuring inclusive, sustainable, and stable
growth.

Conclusion
While adjustments to the repo rate are an important tool for managing economic growth
and controlling inflation, their impact is often influenced by several factors beyond the
central bank’s control. External shocks such as global trade tensions, geopolitical
uncertainties, and fluctuations in commodity prices can weaken the effectiveness of these
rate changes. Additionally, the benefits of repo rate cuts do not always reach businesses and
consumers immediately due to delays in how quickly banks adjust their lending rates—a
phenomenon known as monetary transmission lag.
Moreover, if there is a lack of coordination between the government’s fiscal policies and the
RBI’s monetary actions, the overall impact of these measures can be diluted. For instance,
excessive government borrowing during a period of rate cuts may crowd out private
investment, reducing the stimulus effect.
Therefore, to fully realize the advantages of repo rate adjustments, it is crucial to adopt a
balanced and well-coordinated approach. This means that monetary policy must work hand-
in-hand with fiscal discipline and structural reforms. Only through such collaboration can the
economy be steered towards sustained growth, stable inflation, and financial stability,
ultimately benefiting all sections of society