The Reserve Bank of India (RBI) has announced a cut in its key repo rate by 25 basis points to 6.25%, marking the first rate cut in nearly five years. The decision, which was made at the conclusion of the Monetary Policy Committee (MPC) meeting held from February 5-7, is expected to bring down loan EMIs and provide relief to borrowers.
RBI governor Sanjay Malhotra, who chaired his first MPC meeting, announced the widely anticipated move on Friday morning. The six-member committee, which includes three RBI members and three external members, voted unanimously in favor of reducing the repo rate after keeping it unchanged for eleven consecutive meetings.
“The Monetary Policy Committee unanimously decided to reduce the policy rate by 25 basis points from 6.5% to 6.25%,” said RBI governor Malhotra in a presser after the MPC meet.
“Inflation targeting has served the Indian economy very well. Average inflation has remained lower since introduction of monetary policy framework,” said the RBI governor.
Discussing global financial market dynamics, Malhotra pointed out that expectations regarding the size and pace of rate cuts in the United States had led to a strengthening of the US dollar.
He said, “The global economic backdrop remains challenging. The global economy is growing below the historical average, even though high-frequency indicators suggest resilience, along with continued expansion in trade. Progress on global disinflation is stalling, hindered by services price inflation.”
This marks the first rate reduction since May 2020 and is aimed at supporting economic growth, which is projected to slow down to a four-year low. The interest rate cut follows finance minister Nirmala Sitharaman’s announcement in the 2025-26 Budget, which introduced the largest-ever tax break for the middle class to stimulate consumption amid the economy’s slowest growth since the pandemic.
According to Reuters, Boman Irani, the president of the Confederation of Real Estate Developers’ Associations of India, said: “The RBI’s repo rate cut complements recent budget measures designed to boost spending and stimulate economic growth. This monetary policy was imperative, especially after the recent 50-basis-point cut in the Cash Reserve Ratio (CRR), which has already injected significant liquidity into the banking system.
“While the current cut may have a limited direct impact, we anticipate that a further rate reduction in the next MPC meeting will provide stronger impetus to overall demand, accelerating housing sales, particularly in the mid-income and affordable segments.”
Additionally, Reuters reported that Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, Mumbai, commented: “The MPC’s decision to cut repo rate by 25 bps and maintain a ‘neutral’ stance is completely in line with our expectations. The softening growth and inflation outlook has provided room to monetary easing. The RBI will need to monitor liquidity conditions more closely to ensure liquidity stance remains in sync with the policy stance.”
The central bank has been facing a delicate balancing act between stimulating economic growth and managing inflation. While the economy is expected to expand between 6.3%-6.8% in the coming fiscal year, it remains below the 8.2% growth recorded in fiscal 2024. Inflation, however, has remained above the RBI’s medium-term target of 4% for most of the past year, further complicating the central bank’s policy decisions.
Despite the slowdown in economic growth, the rupee has been under pressure, prompting the RBI to intervene through dollar selling to stabilize the currency. Economists have been divided on the timing of the rate cut, as core inflation remains below 4%, while headline inflation remains a concern.
The RBI has also been focusing on ensuring adequate liquidity in the banking system. In late January, the central bank introduced measures to inject 1.5 trillion rupees ($17.22 billion) into the financial sector. Investors are now looking forward to additional steps from the RBI, including a potential reduction in the cash reserve ratio to further support liquidity.
The government has projected a full-year fiscal deficit of 4.8% of GDP for the current financial year, with an aim to reduce it to 4.4% in 2025-26. The latest monetary policy decision is expected to complement fiscal measures in driving economic recovery and ensuring financial stability in the coming months.
With the RBI’s rate cut, borrowers can expect lower equated monthly installments (EMIs) on home, auto, and other loans, providing some relief amid ongoing economic uncertainties. However, further policy adjustments will depend on inflation trends and global economic developments in the months ahead.
(With inputs from agencies)
