Newsletter
RBI surprised everyone with two big moves in its latest monetary policy. It cut the repo rate by 0.5% to 5.5%, its third straight cut, to help boost lending and spending as inflation cools down.
At the same time, it also reduced the cash reserve ratio (CRR) by 1%, making more money available for banks to lend.
In simple terms, the repo rate is the rate at which banks borrow money from RBI, lowering it makes loans cheaper for businesses and consumers.
The CRR is the portion of deposits that banks must keep with the RBI without earning interest, reducing it frees up more money for banks to lend.
By cutting both, the RBI is trying to put more money into the economy, making it cheaper to borrow and encouraging people and companies to spend and invest more.
Moreover, cutting the CRR will free up about ₹2.5 trillion for banks to lend, helping them pass on the lower repo rate to customers more quickly through cheaper loans.
Worth noting: banks already have plenty of extra funds in the system, with the RBI having added a solid ₹9.5 trillion in long-term liquidity since January.
Big theme: the key reason behind the 50 bps rate cut is this steady fall in inflation. With CPI now at 3.2%, the lowest since July 2019, the RBI is pushing to make borrowing cheaper.
EMIs could drop by ₹800–1,200 per lakh, giving relief to borrowers. But for savers, this also means lower returns on deposits, with savings rates already near record lows. This generally means people come for stocks or riskier assets to earn higher returns.
