[09-12-2025] The lowering of bank rate by the reserve bank of India leads to? [UPSC PYQ 2011]
What did RBI do?
RBI reduced the repo rate by 0.25%, bringing it to 5.25%.
Total rate cut in 2025 = 1.25% (125 basis points).
What is repo rate (in one line)?
Repo rate is the interest rate at which banks borrow money from RBI.
If repo rate goes down → Loans become cheaper.
Why did RBI cut rates?
Inflation is very low → Prices are stable.
Economy is doing well → Good GDP growth.
RBI wants to boost borrowing and spending.
There is room to lower rates without causing inflation.
What are the benefits?
Lower EMIs on home, car, and business loans.
People and companies borrow more, invest more, and spend more.
Growth in sectors like housing, automobiles, small businesses.
More liquidity (cash flow) in the economy.
What are the risks?
Banks may reduce deposit interest rates → savers earn less.
Too much borrowing can increase inflation later.
Banks may delay passing on the rate cut to customers.
Conclusion
RBI’s rate cut is a pro-growth move: it aims to boost borrowing, spending, and investment because inflation is low and the economy is strong. But RBI must watch inflation and ensure banks actually pass on the benefit.
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