07-June-2025 Daily Answer Writing
Q1) Critically examine the rationale and likely economic impact of the RBI’s recent decision to reduce the repo rate and cash reserve ratio.
(GS3- Economy, 15 Marks, 250 words)
Answer:
The Reserve Bank of India (RBI) recently reduced the repo rate by 50 basis points (bps) to 5.50% and the Cash Reserve Ratio (CRR) by 100 bps to infuse liquidity, spur lending, and maintain growth amid moderating inflation. This marks a shift from an “accommodative” to a “neutral” stance in monetary policy.
Rationale Behind the Move:
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Tamed Inflation: Consumer Price Index (CPI) is forecasted at 3.7% for 2025–26, below the earlier projection of 4%.
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Growth Stabilization: Real GDP growth forecast is retained at 6.5%, supported by private consumption and investment revival.
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Liquidity Enhancement: CRR cut will release ₹2.5 lakh crore, improving credit availability to MSMEs and rural sectors.
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Global Uncertainty: The move is precautionary given volatile global demand and supply-side shocks.
Expected Economic Impact:
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Lower Interest Burden: Borrowing becomes cheaper, encouraging investment and household consumption.
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Revival in Demand: Especially for housing, automobiles, and services.
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Transmission Challenge: Effectiveness depends on how banks pass on benefits to end-users.
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Impact on Depositors: Lower returns on savings may affect household financial behavior.
Conclusion:
The RBI’s proactive policy pivot attempts to balance inflation management with growth imperatives. However, its success will depend on timely policy transmission and coordinated fiscal support to sustain momentum in a volatile economic environment.
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