The meeting of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) commenced on February 05 and would wind up on February 07. In this meeting, chaired by RBI Governor Sanjay Malhotra, a decision on the interest rate will be made. This will be the first meeting under his chairmanship. RBI has kept the repo rate unchanged at 6.5% since February 2023. Bank of America Securities' economist (India and Asia) Rahul Bajoria and Elara Securities' economist Garima Kapoor expect that the RBI will reduce the repo rate by 0.25% to 6.25%. The last change was in February 2023
The last meeting of the Monetary Policy Committee was held in December, in which the committee did not change the rates for the 11th consecutive time. The apex bank had last increased the rates by 0.25% to 6.5% in February 2023. Experts expect, there could be a reduction of up to 1% in several phases this year
If the Reserve Bank reduces interest rates, the burden of EMI on common people will decrease. This will lead to additional savings. According to experts, RBI can reduce the repo rate by up to 1% in a phased manner this year. This could bring the repo rate to 5.50% by the end of 2025. Additionally, by reducing the Cash Reserve Ratio (CRR) by 0.50% or by purchasing bonds from the open market, RBI can also increase cash in the banking system. Policy Rate is a Powerful Tool to Combat Inflation
Central banks have a powerful tool in the form of the policy rate to combat inflation. When inflation is very high, the central bank tries to reduce the money flow in the economy by increasing the rate. If the benchmark rate is high, the loans that banks receive from the central bank become expensive. In turn, banks make loans expensive for their customers. This reduces the money flow in the economy. When the money flow decreases, demand decreases, and inflation reduces. Similarly, when the economy is going through a bad phase, there is a need to increase the money flow for recovery. In such a situation, the central bank reduces the policy rate. This makes the loans that banks receive from the central bank cheaper, and customers also get loans at lower rates.Original Article