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RBI Cuts Repo Rate to 7.75%
Jan 16, 2015

The Reserve Bank of India cut its Repo interest rate by 25 basis points to 7.75 per cent on 15 January, making its first reduction since May 2013, as inflation showed signs of slowing and the government was making efforts to contain the fiscal deficit.

  • Repo is the rate at which RBI lends short term funds to banks.

  • Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009.

  • The move would send out a positive signal that RBI is now focused on growth, and that inflation was finally under control.

  • It is expected banks to pass on the rate cut to consumers through a 50 basis point-reduction in lending rates.

  • Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015.

  • On current policy settings, inflation is likely to be below 6 per cent by January 2016.

  • Demands for a rate cut had been mounting following the steady decline in inflation.

  • Crude prices, barring geo-political shocks, are expected to remain low over the year.

  • Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December.

  • The government has reiterated its commitment to adhering to its fiscal deficit target.

  • It shows a major shift in RBI’s monetary policy stance.

What it Effects?

25 basis point Repo rate cut announced by the RBI is a welcome move and consistent with strong and ongoing disinflationary trends identified in the Mid-year Economy Analysis presented to the Parliament last month.

This move will provide a fillip to the economy directly by increasing the private sector’s ability and willingness to spend.

It should also help indirectly by improving balance sheet of the Corporate Sector and banks, facilitating an increase in the demand for and supply of credit.

Along with other policy actions already taken by the Government and other that are under its consideration, this move represents one more step towards reviving investment and realizing India’s medium term growth potential.


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