A SURPRISINGLY BOLD MOVE

In a game-changing move, the MPC slashed the repo rate by 50 bps to boost consumption and investment, giving a fresh push to GDP growth

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The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) cut the policy repurchase rate (repo rate) by 50 basis points in its June review. While a rate cut was largely expected, the quantum of the rate cut came as a surprise. All financial markets cheered the larger-than-expected repo rate cut by the MPC.

The repo rate now stands at 5.5%. Cumulatively, the MPC has reduced the policy repo rate by 100 basis points in quick succession since February '25.

The repo rate is the interest rate at which banks borrow from the RBI during times of liquidity crunch in exchange for government securities as collateral. This repo rate acts as a benchmark and influences other interest rates in the economy like banks' lending and deposit rates, corporate bonds, government bonds, etc.

Following the repo rate cut, commercial banks in the country are expected to lower interest rates, both on deposits and lending. Lower lending rates will eventually lead to credit growth in the economy. However, the rate transmission happens with a lag. To save margins, banks typically cut deposit rates ahead of lowering their lending rates.

This time around, leading banks like the State Bank of India (SBI), HDFC Bank and ICICI Bank have already announced cuts in interest rates on their deposits. Other banks are expected to follow suit.

What about the transmission of rates from the previous rate cuts? In a note, ratings agency Crisil has said, since the rate cut in February '25, deposit rates have decreased by 15 basis points on average till May; home loan rates by 30 basis points and automobile loan rates by 20 basis points.

So, complete rate transmission is yet to happen. Significantly, what enables a quicker transmission of rates is the level of surplus liquidity in the system.

CRR CUT IN ADVANCE