09-Jun-2025

Repo Rate

Economics

Why in News? 

The RBI has cut the repo rate by 50 basis points to 5.5% and changed its policy stance from 'Accommodative' to 'Neutral', exceeding market expectations. 

About Repo Rate 

  • Repo rate is the interest rate at which the RBI lends short-term funds to commercial banks. 
  • It is a monetary policy tool used to regulate liquidity, inflation, and economic activity in the country. 
  • Lowering the repo rate encourages banks to borrow more, increasing money supply and promoting growth. 
  • Raising the repo rate makes borrowing expensive, reducing the money flow and helping to control inflation. 
  • It directly impacts loan interest rates, investment decisions, and overall demand in the economy.

Reserve Bank of India (RBI) 

  • The Reserve Bank of India (RBI) is the central bank of India, responsible for regulating and supervising the country's banking system. 
  • It manages the issuance, circulation, and stability of the Indian rupee, ensuring adequate supply and control. 
  • RBI was established in 1934 under the Reserve Bank of India Act, following the recommendations of the Hilton Young Commission (1926 Royal Commission on Indian Currency and Finance). 
  • Initially set up as a privately owned institution, the RBI was nationalized in 1949 and is now fully owned by the Ministry of Finance, Government of India.

Preparing Through MCQ

Q. Which of the following statements is/are correct with reference to Repo Rate?

(A) The RBI has cut the repo rate by 50 basis points and shifted its policy stance from 'Accommodative' to 'Neutral'. 
(B) The repo rate is the rate at which commercial banks lend to the RBI. 
(C) Lowering the repo rate helps in increasing money supply and stimulating economic growth. 
(D) Raising the repo rate makes borrowing affordable, which controls inflation. 

Choose the correct answer using the codes given below: 

(1) (A) and (C) only 
(2) (A) and (D) only 
(3) (A), (B) and (C) only 
(4) (A), (B) and (D) only

Answer: (1) (A) and (C) only