RBI MPC Decision Overview
RBI MPC Repo Rate Cut and Policy Signals: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has reduced the policy repo rate by 25 basis points to 6.25%. This marks the first repo rate cut after nearly five years, signalling a calibrated shift in monetary policy direction. The decision was taken under the Liquidity Adjustment Facility (LAF) framework.
The rate cut reflects improving inflation dynamics and a cautious optimism on economic recovery. However, the RBI has maintained a balanced approach by retaining its existing policy stance.
Neutral Monetary Policy Stance
The MPC decided to continue with a neutral monetary policy stance. A neutral stance implies that the central bank is not pre-committed to either tightening or easing and retains flexibility. Future policy actions will depend strictly on evolving macroeconomic conditions.
This approach allows the RBI to respond swiftly to inflationary pressures or growth slowdowns. It also signals policy prudence amid external uncertainties.
Growth and Inflation Projections
The MPC has projected GDP growth for FY 2025–26 at 6.7%, indicating a recovery from the weaker growth observed during Q2 of FY 2024–25. Domestic demand is expected to remain resilient, supported by investment and consumption.
On inflation, food inflation pressures are expected to soften significantly. Improved supply conditions and easing commodity prices contribute to this outlook. Core inflation, excluding food and fuel, is projected to rise moderately but remain within manageable levels.
Static GK fact: India follows a flexible inflation targeting framework, with a mandated inflation target of 4% ± 2%, adopted in 2016.
Rationale Behind the Rate Cut
The MPC’s decision is anchored in declining headline inflation and signs of growth revival. The committee acknowledged that inflation has moderated sufficiently to allow policy space for easing.
However, risks remain elevated due to excessive volatility in global financial markets. Additionally, uncertainties in global trade policies and adverse weather events pose potential threats to price stability and growth momentum.
The rate cut is thus seen as a supportive measure rather than a shift to aggressive monetary easing.
Liquidity Adjustment Facility Explained
The Liquidity Adjustment Facility (LAF) is a key monetary policy tool used by the RBI to manage liquidity in the banking system. It operates through repo and reverse repo operations.
Under the repo facility, banks borrow short-term funds from the RBI by pledging government securities. Under the reverse repo, banks park surplus funds with the RBI. Together, these instruments help regulate short-term interest rates and liquidity conditions.
Static GK Tip: Repo rate changes directly influence bank lending rates, affecting consumption and investment demand in the economy.
Composition and Role of MPC
The Monetary Policy Committee was constituted under Section 45ZB of the RBI Act, 1934, following amendments made in 2016. It comprises six members.
Three members are from the RBI, including the Governor, while three external members are appointed by the Central Government. These external members hold office for four years or until further orders.
The MPC is legally mandated to determine the policy rate to achieve the inflation target set by the Government of India.
Static Usthadian Current Affairs Table
RBI MPC Repo Rate Cut and Policy Signals:
| Topic | Detail |
| Repo Rate Decision | Reduced by 25 basis points to 6.25% |
| Policy Stance | Neutral |
| GDP Growth Projection | 6.7% for FY 2025–26 |
| Inflation Target | 4% with a tolerance band of ±2% |
| MPC Legal Basis | Section 45ZB of RBI Act, 1934 |
| MPC Composition | 6 members (3 RBI + 3 Government nominees) |
| Liquidity Tool | Liquidity Adjustment Facility |
| Inflation Trend | Food inflation easing, core inflation moderate |
