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To push banks to lend, RBI may widen policy rate corridor to 75 bps
SUMMARY
The Reserve Bank of India (RBI) is considering widening the policy rate corridor to 75 basis points (bps) to encourage banks to increase lending. This move aims to enhance monetary transmission and stimulate economic activity.
The policy rate corridor is the range between the Standing Deposit Facility (SDF) rate and the Marginal Standing Facility (MSF) rate, with the repo rate at the center. By widening this corridor, the RBI seeks to make it less attractive for banks to park excess funds with the central bank and more appealing to lend to businesses and consumers.
This consideration comes amid a backdrop of easing inflation and a desire to support economic growth. Retail inflation has slowed to a near six-year low of 3.16% in April, providing the RBI with room to adjust monetary policy. Additionally, India's GDP grew by 7.4% in the March quarter, indicating robust economic activity.
The RBI's Monetary Policy Committee (MPC) is expected to announce its decision on June 6, 2025. Economists anticipate a third consecutive rate cut, potentially reducing the repo rate to 5.75%. The potential widening of the policy rate corridor is part of the RBI's broader strategy to ensure that policy rate cuts effectively translate into increased lending and economic growth.
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