If sources are to be believed, the Reserve Bank of India is imminent to cut the repo rate by 25 basis points and bring it to 6.25% on Friday. The repo rate is the interest rate at which the central bank lends money to commercial banks. With a fall in the repo rate, commercial banks will cut their interest rate and it may bring down the EMIs.

But the important question is: what has happened to the Indian economy in the last two months that the RBI will cut its interest rate after 22 months?

Then RBI Governor Shaktikant Das disappointed the business community and people in general when he did not announce the much-expected rate cut in December last year. He slashed the Cash Reserve Ratio by 50 basis points and brought it down to 4%.

The CRR is the ratio of the amount every commercial bank must leave deposited with RBI without using in giving loans or buying government securities.

When the CRR is cut, more money is left with banks and they can lend more, but without reducing the interest rate.

An additional amount of Rs. 1.16 lakh crore was made available by slashing the CRR. Besides, the central bank last week announced to infuse Rs 1.50 lakh crore into the banking system.

But why the Monetary Policy Committee of the RBI should recommend slashing the repo rate?

Analysts believe, there are many reasons.

The first and foremost reason is the inflation rate that has remained untamed and much above the target of 4% set by the RBI. Though the prices of food items, particularly vegetables have come down to some extent, other factors remain high. The RBI has put its emphasis on reducing inflation.

However, the Union Budget 2025 has made it clear that the middle class will be left with more disposable income as income up to Rs 12 lakh has been made tax-free.

Though the emphasis will be on increasing consumption, it will also encourage people to save and put money in small deposit schemes. This will come at the most opportune moment as the banking system has witnessed a fall in deposits.

As the Indian rupee has depreciated considering breaking all records and breaching the level of 87 against US Dollar, the RBI must take steps to control further depreciation.

As the Foreign Portfolio Investment outflow from November 2024 till now has been $7.5 billion, a downward journey will arrest the flow.

A trade war has begun between the US on one hand and China, Mexico and Canada on the other hand after President Donald Trump announced punitive tariffs on imports from these countries, and these countries have imposed retaliatory tariffs in response.

Indian businesses need more money at cheaper rates to exploit the situation and increase their exports to the US.

Analysts have hoped that if the central bank cuts the repo rate by 25 basis points and brings it to 6.25% as expected, external benchmark lending rates (EBLR) linked to the repo rate will come down by 25 bps.

It may give much-needed relief to borrowers as their equated monthly installments (EMIs) may come down at least marginally.

If the repo rate is cut, commercial banks may reciprocate it by slashing interest rates on loans that are linked to the marginal cost of fund-based lending rate or MCLR.

Will RBI Governor Sanjay Malhotra take the plunge in the first MPC meeting of his tenure?

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