Why in News?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has lowered the repo rate by 25 basis points (bps) to 6.25% - the first rate cut in 57 months.

This move is aimed at supporting economic growth amid easing inflation projections.

Key Highlights of the RBI’S MPC Decisions:

• Repo rate cut: The repo rate is the interest rate at which a central bank lends money to commercial banks. The term "repo" stands for "repurchase option". The RBI reduced the repo rate from 6.5% to 6.25%.
• Inflation outlook: Inflation is expected to ease to 4.4% this quarter and further moderate to 4.2% in 2025-26.
• Impact on loans: The reduction in the repo rate could lead to cheaper loans for homes, cars, and other purposes.
• First rate cut since 2020: The last rate cut occurred in May 2020 when the repo rate was reduced to 4% during the COVID-19 crisis.

Digital Security Initiative - Introduction of ‘bank.in ’ Domain:

• Exclusive internet domain for banks: The RBI has announced the launch of the ‘bank.in ’ domain for Indian banks to enhance trust in digital transactions.
• Objective: To reduce cybersecurity threats, prevent phishing, and streamline secure financial services.
• Implementation:
  • The Institute for Development and Research in Banking Technology (IDRBT) will act as the exclusive registrar.
  • Actual registrations will begin in April 2025.
  • Detailed guidelines for banks will be issued separately.
• Future expansion: Plans to introduce ‘fin.in’ for non-bank financial entities in the future.

Key Takeaways from the RBI’S MPC Decisions:

• Monetary policy stance:
  • Neutral approach: Despite the rate cut, the MPC has maintained a neutral monetary stance.
  • Global uncertainties: Risks from geopolitical tensions, trade protectionism, and financial market volatility remain key concerns.
  • Inflation targeting: The RBI remains committed to ensuring inflation aligns with its target while supporting economic growth.
• Economic growth projections:
  • Real GDP growth forecast:
    • 6.4% for the current financial year (2024-25). 6.7% for 2025-26.
    • Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.
  • Factors supporting growth:
    • Improving employment conditions.
    • Income tax relief from the 2025-26 Union Budget.
    • Stable agricultural output with the assumption of a normal monsoon.
• Rural vs. urban demand:
• Rural demand: On an upward trend, showing resilience.
• Urban consumption: Subdued, with mixed signals from high-frequency indicators.
• Currency and external sector:
  • Rupee volatility:
    • The Indian rupee has depreciated by 3.2% against the US dollar since November 6, 2024, in line with global trends.
    • The RBI is focused on maintaining stability in the currency market without targeting a specific exchange rate.
  • Foreign exchange reserves:
    • Stand at $630.6 billion as of January 31, 2025, covering over 10 months of imports.
    • The RBI has been using foreign exchange reserves to prevent excessive volatility while allowing a gradual depreciation.
• Current account deficit: Expected to remain within sustainable levels, ensuring external sector resilience.
• Liquidity management:
  • Liquidity crunch in December-January: Attributed to advance tax payments, capital outflows, forex operations, and increased currency circulation.
  • Rise in currency in circulation: Increased by ₹1.80 lakh crore (5.3%) to ₹35.99 lakh crore as of January 2025.
  • Banks urged to lend in Call Money Market:
    • The call money market is a short-term financial market where banks and other institutions borrow and lend funds to each other. It's also known as the "notice money" market.
    • RBI Governor Sanjay Malhotra advised banks to actively participate in the uncollateralized call money market instead of parking funds with the RBI.
  • Measures to address liquidity: The RBI has assured proactive interventions to ensure orderly liquidity conditions.

 Market Reactions of the RBI’S MPC Decisions:

• Stock markets: The Sensex fell by 198 points (0.25%) to 77,860.19, while the NSE Nifty declined by 43 points (0.18%) to 23,559.95.
• Banking sector performance: The BSE Bankex fell by 0.49%.
• Bond markets: The 10-year bond yield increased slightly to 6.70%.
• Rupee movement: The rupee appreciated by 15 paise to 87.43 against the US dollar.

Future Monetary Policy Expectations:

• Less restrictive policy on the anvil? Malhotra hinted that the MPC might shift its stance from neutral if inflation-growth dynamics turn favorable.
• Expected rate cuts: There are expectations of two more rate cuts in 2025 if inflation moves as projected.
• Aspirational growth target: The RBI Governor expressed a desire for 7% GDP growth.

Conclusion:

• The RBI’s rate cut signals a shift in monetary policy to stimulate economic growth while maintaining inflation control.
• With a neutral stance, the central bank is balancing inflationary concerns and global uncertainties while ensuring stability in India’s financial markets.
• The introduction of the ‘bank.in ’ domain is a crucial step toward securing India’s digital financial ecosystem.
• The market remains cautious, awaiting further policy signals from the RBI.