Mumbai: In a significant move to revive India’s sluggish economy, the Reserve Bank of India (RBI), under its newly appointed Governor Sanjay Malhotra, has cut the repo rate by 25 basis points to 6.25%. This marks the first rate reduction since May 2020 and is expected to bring relief to borrowers, with home, auto, and personal loans likely to become cheaper.
The Monetary Policy Committee (MPC), headed by Governor Malhotra, unanimously decided to lower the repo rate during its latest meeting. The repo rate, the interest rate at which the RBI lends to commercial banks, plays a crucial role in determining borrowing costs for consumers. A lower repo rate typically translates to reduced interest rates on loans, making credit more affordable for individuals and businesses.
Economic Growth and Inflation Outlook
Governor Malhotra projected India’s GDP growth at 6.7% for the fiscal year starting April 2025, while inflation is expected to ease to 4.2%. For the current fiscal year ending March 2024, the RBI estimates GDP growth at 6.4%, the lowest in four years, with inflation pegged at 4.8%.
The rate cut comes amid a challenging global economic environment, with the Indian rupee hitting record lows against the US dollar. Analysts warn that the reduction could exert pressure on domestic inflation and the currency, potentially triggering capital outflows. However, the RBI remains committed to maintaining price stability and fostering sustained economic growth.
Rationale Behind the Rate Cut
Explaining the decision, Governor Malhotra highlighted that inflation has shown signs of moderation, supported by favorable food prices and the impact of past monetary policy actions. He added that inflation is expected to align with the RBI’s target of 4% by 2025-26.
The MPC also noted that while economic growth is recovering from its lowest point in July-September 2024, it remains below last year’s levels. “These growth-inflation dynamics open up policy space for the MPC to support growth while remaining focused on aligning inflation with the target,” Malhotra stated.
Expert Reactions
Radhika Rao, Senior Economist at DBS Bank, commented that the RBI’s emphasis on flexibility in inflation targeting suggests a tolerance for modest supply-driven volatility. She added that the central bank’s neutral stance indicates a cautious approach, with future decisions dependent on macroeconomic data.
Suman Chowdhury, Chief Economist at Acuité Ratings & Research, noted that the RBI has initiated a shallow rate-cutting cycle with limited clarity on future reductions. “The retention of the neutral stance highlights that policy direction may be revised based on incoming data and external factors,” he said.
What This Means for Consumers
The rate cut is expected to benefit borrowers by reducing EMIs on home, auto, and personal loans. However, savers might see lower returns on fixed deposits and other savings instruments as banks adjust interest rates in response to the reduced repo rate.
Looking Ahead
The RBI’s decision reflects its commitment to balancing growth and inflation in a volatile global economy. With another rate cut possible in April, the central bank aims to create conducive macroeconomic conditions for sustained growth and financial stability.
Source: Web Team, C6N
