Question

“The RBI on June 6, 2025 cut the repo rate by 50 basis points and the cash reserve ratio by 1000 basis points.”

Briefly discuss how each of the above-mentioned measures can affect the money supply in the economy.

Answer 1

A 50 bps cut in the repo rate lowers the price at which RBI supplies short‑term funds to banks, which tends to push down market interest rates, encourages banks to borrow from the central bank and to reduce lending rates, and thereby (through higher bank lending and the usual credit‑creation process) increases broad money over time. A CRR cut of 1,000 basis points (1000 bps = 10 percentage points) directly reduces the fraction of deposits banks must keep as reserves with the RBI, immediately freeing up reserves that banks can use to make loans; this raises the monetary base available for deposit creation and,via a larger money multiplier,can expand the money supply more quickly and directly than a repo‑rate cut. Both measures’ ultimate impact depends on banks’ willingness to lend and on loan demand (and can be offset by central‑bank sterilisation or cause inflationary pressure if aggregate demand rises too much).