Can the RBI’s 100 basis points rate cut in 2025 revive economic growth?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has cumulatively slashed the key policy rate—the repo rate—by 100 basis points in 2025.

- Kishore Kumar Biswas

Theoretical Basis: Monetarism and Growth

The RBI’s approach reflects the influence of monetarist economic theory, which holds that a well-regulated money supply can stabilize prices and support economic growth. Under this framework, increasing money supply tends to lower interest rates, stimulating investment, production, employment, and in turn, aggregate demand.

In the current scenario, the RBI appears to be prioritizing growth concerns over inflation risks, indicating a strategic pivot toward reviving a slack domestic economy amid uncertain global conditions.

CRR cut adds to liquidity

Alongside the repo rate cuts, the RBI has also reduced the Cash Reserve Ratio (CRR) by 100 basis points, bringing it down to 3%. CRR is the proportion of total deposits that commercial banks must hold as reserves, either with the RBI or internally, without using it for lending. By lowering the CRR, banks are now able to lend a higher portion of their deposits, potentially injecting an additional ₹2.5 lakh crore into the economy by the end of 2025.