Mumbai, February 7: In a decisive move to stimulate economic growth, the Reserve Bank of India (RBI) under its newly appointed Governor, Sanjay Malhotra, announced a 25-basis point cut in the repo rate, bringing it down from 6.50% to 6.25%. This marks the first policy rate reduction in nearly five years, signaling a shift in the central bank’s monetary stance to support a slowing economy while keeping inflation in check.
The decision, made unanimously by the Monetary Policy Committee (MPC), comes against the backdrop of subdued economic growth and moderating inflation. While the Indian economy is projected to expand at 6.4% in FY 2024-25, its slowest pace in four years, the inflation trajectory has shown signs of stabilization, with the Consumer Price Index (CPI) easing to 5.22% in December 2024 from a peak in October. The RBI expects inflation to further decline to 4.2% in FY 2025-26, aligning closer to its long-term target of 4%.
Governor Malhotra emphasized that a less restrictive monetary policy was necessary to balance growth and inflation objectives. While higher interest rates had previously been used to combat inflation, the recent moderation in price levels has given the RBI room to shift its focus toward reviving investment, consumption, and credit demand.
The reduction in the repo rate is expected to bring relief to borrowers, as commercial banks will likely lower their lending rates on home loans, auto loans, and corporate borrowings. Lower financing costs could revive credit demand and encourage greater investments, particularly in real estate, infrastructure, and manufacturing sectors.
However, fixed deposit (FD) rates may witness a downward revision, affecting returns for savers and pensioners. The decision also raises concerns about capital outflows, as lower interest rates reduce the appeal of Indian assets to foreign investors, potentially exerting pressure on the rupee, which has already been depreciating against the US dollar.
While the policy stance remains neutral, the RBI has signaled a cautious yet flexible approach to future rate decisions, with growth recovery and external risks playing a crucial role in shaping the next moves. Experts note that despite this rate cut, the RBI is likely to maintain policy discipline and intervene strategically in the currency markets to prevent excessive volatility.
Similarly, Suman Chowdhury, chief economist at Acuité Ratings & Research, noted that the MPC’s decision suggests a cautious and data-driven monetary policy approach. He stressed that while rate cuts could continue, the RBI remains watchful of inflation risks and global uncertainties.
The RBI’s decision to initiate an easing cycle signals confidence in the economy’s ability to absorb rate cuts without reigniting inflationary pressures. However, global financial conditions, fiscal policy decisions, and commodity price movements will play a significant role in determining whether the central bank proceeds with further rate reductions.
For now, the 25-basis point cut serves as a strategic move to support growth while maintaining macroeconomic stability. As the economy navigates global headwinds and domestic structural shifts, the RBI’s evolving monetary policy will be closely monitored by markets, businesses, and policymakers alike.
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