The Reserve Bank of India (RBI) has made headlines once again, this time for its decision to cut the repo rate for the first time since 2020. Governor Sanjay Malhotra announced on February 7, 2025, during the Monetary Policy Committee (MPC) meeting, the rationale behind the cut, which is seen as pivotal for the Indian economy.
The MPC unanimously decided to lower the policy repo rate by 25 basis points, bringing it down from 6.5% to 6.25%. This decrease signifies the RBI's approach to not only combat inflationary pressures but also to facilitate growth amid shifting economic conditions. Governor Malhotra explained, "The MPC observedthat inflation has eased, aided by a favourable outlook on food prices and theongoing impact of previous monetary policy measures." This change aims to align inflation with the RBI’s target rate.
With the new rates, the Standing Deposit Facility (SDF) stands at 6.0% and both the Marginal Standing Facility (MSF) rate and the Bank Rate remain at 6.5%. The last time the RBI made such changes to the repo rate was back in May 2020, when it was cut drastically due to the economic fallout from the COVID-19 pandemic. Following initial hikes beginning May 2022, this marks a significant pivot of strategy as the central bank tries to support the economy as pressures begin to ease.
Economic analysts have taken note of this decision. A Reuters poll indicated over 70% of analysts were expecting this move, seeing it as necessary to spur growth. Investment and growth indicators have shown some signs of distress, with GDP growth projections for FY25 being revised downwards from 7% to 6.4% due to anticipated economic headwinds.
Many have welcomed the notion of this rate cut as the initial step for sustained monetary relief, indicative of the central bank’s responsive measures during uncertain times. According to SBI Research, the RBI could see cumulative cuts to the interest rate to the tune of 75 basis points throughout the year, with the possibility of additional cuts coming as early as April if economic stimuli remain weak.
The RBI’s recent fiscal measures come against the backdrop of Finance Minister Nirmala Sitharaman's announcements during the Union Budget, which included income tax relief aimed at boosting consumption and the economy. Reducing the fiscal deficit is also part of the overall strategy to drive growth. Such comprehensive approaches highlight the government and RBI's intent to create momentum for recovery and resilience.
Market sentiment reflected heightened anticipation as equities showed signs of readiness pre-announcement. Many investors were hopeful for this rate cut to stimulate growth, especially with the Nifty 50 trading lower due to investor concern and market volatility trends. Analysts are now watching closely as the financial market digests this news and anticipates movements accordingly.
Historically, the RBI has moved swiftly with monetary policies, often driven by external pressures such as global economic conditions and domestic inflationary trends. This time, the emergence of geopolitical tensions, particularly the impact of the Russia-Ukraine war on global supply chains, has contributed to the more cautious stance. What remains to be seen is how the RBI balances its mandate of controlling inflation with the growth requirements amid these turbulent times.
Overall, the unanimous decision made by the MPC led by Governor Malhotra is seen as part of broader efforts to recalibrate financial strategies and economic projections for India. The decision may also provide insights for future Federal policies as they look to accommodate growth, inspire confidence, and manage inflation effectively.
With the economic indicators changing, a concerted push around fiscal initiatives and monetary policies will certainly shape the outlook for the Indian economy moving forward. Investors and analysts alike remain tuned to the RBI's next steps and the possible cascading effects on both domestic and international economics.