The Reserve Bank of India (RBI) announced on Friday, December 5, that it has reduced the repo rate by 25 basis points to 5.25%, as inflation slid to historic lows and the rupee continued to weaken.
The move was announced after the Sanjay Malhotra-led Monetary Policy Committee (MPC) concluded its three-day meeting held on December 3, 4, and 5.
This year's cumulative cuts now amount to 125 basis points. Retail inflation as measured by the Consumer Price Index (CPI) fell to 0.25% in October, far below the RBI's mandated target band of 2% to 6%. After a detailed assessment of the evolving macroeconomic conditions and the outlook, the MPC voted unanimously to reduce the policy repo rate by 25 basis points to 5.25% with immediate effect.
What is repo rate?
The repo rate is the interest rate at which commercial banks borrow money from the RBI by pledging government securities. A higher repo rate makes borrowing costlier for banks, while a lower rate enables them to access funds more cheaply.
Why RBI adjusts repo rate
The central bank's key objective is to maintain economic stability, which means containing inflation while supporting growth. Adjustments to the repo rate help regulate liquidity, borrowing costs, and overall economic activity.
What rate cut means
The impact of repo rate changes is felt most immediately through floating-rate loans. When the RBI cuts the repo rate, banks can borrow more cheaply and lower their lending rates, causing EMIs to fall and helping customers repay loans faster.
When the repo rate rises, banks' borrowing costs increase, leading to higher loan interest rates. As a result, EMIs go up or loan tenures are extended if the EMI amount remains unchanged.
Which loans feel the greatest impact?
Home loans: The most sensitive to repo rate shifts due to their long tenures and floating-rate structures.
Auto and personal loans: Not directly linked but often revised depending on banks' overall cost of funds.
MSME loans: Many small businesses depend on floating-rate credit, making RBI rate changes significant.
How it affects savings
Repo rate changes also influence deposit rates, though less directly. When the repo rate rises, banks may increase interest rates on fixed deposits (FDs) and recurring deposits (RDs) to attract more funds. Similarly, when the repo rate falls, FD and RD rates usually decline, prompting savers to explore market-linked or alternative investment options.
