The Monetary Policy Committee (MPC) of RBI decided to reduce the repo rate by 0.25 percent. Due to this the repo rate came down to 5.25 percent. The central bank has maintained its monetary policy stance ‘neutral’. All the MPC members unanimously decided to reduce the repo rate. But, the announcement of RBI which is being discussed the most is the open market purchase operation of Rs 1 lakh crore.
Inflation is lower than RBI estimates
This was not a very favorable time for RBI to reduce interest rates. Retail inflation reached all-time low in October. The sharp decline in food prices is responsible for this. Core inflation has also moderated. Due to this, the inflation outlook appears to be lower than RBI’s estimate of two months ago.
No worries about inflation at the moment
CPI inflation is now estimated to be 2 percent in 2025-26. This is an unusual data in case of India. With retail and core inflation expected to be close to the target of 4 percent in the first half of 2026-27, the MPC may have felt that there is no need to worry about inflation.
More impact of increase in liquidity on interest rates
The first question of the borrowers i.e. those taking loans is whether banks will give the benefit of this reduction in repo rate? In the last one year, liquidity has had more impact on loan interest rates than monetary policy. The meaning of OMO purchase of Rs 1 lakh crore is an indication of this. With liquidity coming into the system, RBI is putting pressure on banks to reduce funding costs.
Home loan customers get the most benefits
RBI pressure will affect loan rates. Home loan customers will be the first to benefit from this. MSMEs, burdened with high interest rates on working capital, are hopeful that banks will respond quickly this time. There is going to be no relief for those making savings. Interest rates on deposits are already decreasing. It may further decrease due to increase in liquidity.
Additional relief in the form of OMO
Financial markets expected interest rates to decline. But, getting the support of OMO has brought additional relief. Bond yields are expected to fall because increased liquidity will give the government some space for its borrowing programme. Global news and earnings related signals are still expected to have more impact on equity markets.
Signs of softening are visible in some indicators
If we talk about economy, the message is clear. Growth has been good so far. GDP growth in the second quarter was 8.2 percent. But, RBI has shown initial signs of moderation in some indicators. Private investment also seems to be increasing now. But, this requires a long period of low and stable rates. With inflation softening, RBI has scope to maintain this pace.