The Reserve Bank of India (RBI) has delivered its first rate cut in six months, reducing the repo rate by 25 basis points to 5.25%. RBI Governor called the current phase a “rare Goldilocks period”, marked by stable growth and moderate inflation—even as India faces external pressures such as high US tariffs. The move aims to boost liquidity, energize borrowing, and support India’s economic momentum.

This article explains the repo rate, basis points, reverse repo rate, and the complete impact of the latest rate cut on the economy, banks, investors, borrowers, and savers.

What Is the Repo Rate?

The Repo Rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities.

Why It Matters

• Controls liquidity in the banking system
• Manages inflation by regulating money supply
• Guides borrowing costs for individuals and businesses
• Influences growth, investment, and consumption patterns

When RBI cuts the repo rate, banks can borrow funds more cheaply—often passing the benefit to customers through lower loan interest rates.

What Is the Reverse Repo Rate?

The Reverse Repo Rate is the rate at which RBI borrows money from commercial banks, usually to absorb excess liquidity.

• When reverse repo is high, banks prefer parking money with RBI, reducing liquidity.
• When it is low, banks are encouraged to lend more to the economy.

Repo and reverse repo together form the backbone of monetary policy operations.

What Are Basis Points (bps)?

Basis Points are a unit used to express very small changes in interest rates and yields.

• 1 basis point (1 bps) = 0.01%
• 25 bps = 0.25%
• 100 bps = 1%

Financiers use bps because even minor changes matter when dealing with large sums. For example, a 25 bps repo rate cut means the rate has fallen by 0.25 percentage points.

RBI Cuts Repo Rate by 25 bps: Key Highlights

• New Repo Rate: 5.25%
• First rate reduction in 6 months
• Aims to boost liquidity, support credit flow, and stimulate growth
• Comes amid external challenges like high US tariffs
• RBI describes current macroeconomic environment as a “rare Goldilocks period”

Impact of the Repo Rate Cut

The latest rate cut will affect different segments of the economy in multiple ways.

1. Lower Borrowing Costs

Banks’ cost of borrowing falls, allowing them to offer cheaper loans.

• Home loans
• Vehicle loans
• Education loans
• Personal loans
• Business loans

This can boost demand across sectors—especially real estate, consumer durables, and MSMEs.

2. Lower Deposit Returns

Banks may reduce interest rates on:

• Savings accounts
• Fixed deposits (FDs)
• Recurring deposits

This negatively affects retirees and conservative investors who rely on interest income.

3. Cheaper Loans & Reduced EMIs

Borrowers benefit from:

• Lower equated monthly instalments (EMIs)
• Higher loan eligibility
• Greater affordability in housing and credit purchases

Real estate is expected to gain significantly from cheaper home loans.

4. Inflationary Pressure

More borrowing and spending can increase demand.

If supply does not match this demand, it may cause:

• Rise in inflation
• Pressure on essential commodity prices

RBI’s rate decisions aim to maintain a delicate balance between growth and inflation.

5. Increased Credit Flow

With lower funding costs, banks can:

• Lend more to businesses
• Extend credit to MSMEs
• Support manufacturing & services

This can stimulate investment, job creation, and economic expansion.

6. Pressure on Banks’ Margins

If lending rates fall faster than deposit rates, banks face:

• Reduced net interest margins (NIMs)
• Profitability challenges

Some banks may delay passing on the full benefit to customers.

7. Support for Economic Growth

The rate cut is part of RBI’s strategy to:

• Strengthen domestic demand
• Promote private investment
• Enhance liquidity in financial markets
• Support employment generation

This aligns with India’s medium-term growth priorities.

8. Possible Currency Volatility

Lower interest rates may:

• Reduce foreign portfolio inflows
• Put downward pressure on the rupee
• Increase market volatility

However, RBI actively intervenes to maintain currency stability.

RBI’s decision to cut the repo rate to 5.25% marks a strategic shift aimed at boosting liquidity, encouraging credit flow, and sustaining India’s economic momentum during a complex global environment. While borrowers stand to gain from cheaper loans and lower EMIs, savers may see reduced interest earnings.

Overall, the policy move reflects RBI’s confidence in India’s economic fundamentals during what it calls a “rare Goldilocks period”—a phase of balanced growth, moderate inflation, and stable financial conditions.