The Reserve Bank of India (RBI) announced today its first repo rate cut since 2020, reducing the benchmark rate by 25 basis points to 6.25%. This long-awaited maneuver, taking place during the RBI's Monetary Policy Committee (MPC) meeting, aligns with the central bank's strategy to bolster economic growth against the backdrop of easing inflation rates.
RBI Governor Sanjay Malhotra led the session where the MPC unanimously voted to cut the rate, citing improvements in inflation and economic conditions. The last time the rate was lowered was May 2020, when it was slashed to counter the economic fallout from the COVID-19 pandemic. Since then, the RBI had kept the rate unchanged at 6.5% through multiple meetings.
Malhotra emphasized the importance of this decision, stating, "Today's policy reflects a balanced approach of focusing on supporting economic growth, managing inflation, and protecting financial stability." The committee's neutral stance signifies adaptability to changing economic circumstances, allowing the RBI to respond effectively to future challenges.
According to the MPC's projections, the Consumer Price Index (CPI) inflation for FY25 is anticipated at 4.8%, decreasing to 4.2% for FY26. The central bank looks to align inflation closer to its target after observing declines attributed to favorable food prices. The MPC noted, "The overall inflationary pressure is moderatively easing, which gives us room to support economic growth.""]
Expected GDP growth has been set at 6.7% for the fiscal year 2026, with quarterly forecasts ranging from 6.7% to 7%. This positive outlook reflects the committee's aim to stimulate both private consumption and investment through lower interest rates.
Industry experts have welcomed the rate cut, viewing it as beneficial across various sectors. Reeza Sebastian Karimpanal, executive president of residential business at Embassy Group, noted, "The cut will significantly benefit the real estate sector by making housing more accessible, boosting sales, and enhancing liquidity for development projects. This is particularly important for mid-income and affordable housing.""]
The rate cut is anticipated to resonate within financial markets as well, with analysts predicting it will lead to lower equated monthly installments (EMIs) for borrowers and encourage investment. Kaustubh Gupta from Aditya Birla Sun Life AMC stated, "This rate cut is timely, especially when coupled with the government's supportive budget measures. It strengthens our economic framework and is poised to boost consumer confidence among home buyers.""]
Despite these optimistic projections, concerns linger over external economic conditions, especially with the Indian Rupee facing downward pressure and potential capital outflows as global financial trends fluctuate. Governor Malhotra commented on these challenges, acknowledging, "The Indian economy, though strong, is not immune to global headwinds, especially with escalated geopolitical tensions and fluctuatings trade policies." The governor reiterated the RBI's commitment to maintaining orderliness and stability throughout currency market effects, affirming their policy doesn't target specific levels or bands for the rupee.
The economic impact of this decision will take time to manifest, with Governor Malhotra remarking the MPC will remain watchful of global conditions, stating, "We will be proactive and flexible, using all our tools as appropriate to navigate through these unsettling global water.""]
Market participants have noted the response from mutual funds and globally linked financial entities has been measured, as adjustments of up to 4 basis points on bonds shows. Analysts foresee another potential rate cut within the next policy meeting aimed for early April 2025, depending heavily on domestic inflation trends.
Overall, the February 2025 RBI Monetary Policy reflects the broader goals of enhancing liquidity, supporting growth, and mitigating inflation, all with the aim of fostering a more resilient economic environment moving forward. Stakeholders from various sectors will be monitoring the effects of this pivotal policy decision closely as they plan for the months to come.