As inflation eases towards its 4% objective, the Reserve Bank of India (RBI) lowered its benchmark interest rate on Friday for the first time in over five years in an effort to stimulate the flagging economy. The repo rate was cut by 25 basis points to 6.25% by MPC, which was led by RBI Governor Sanjay Malhotra.
“In the first policy review after his appointment in December, RBI Governor Sanjay Malhotra stated that inflation dynamics have provided scope for rate lowering, and even though growth is likely to return, it is substantially lower than the 8.2% in 2023-24,” the MPC remarked. Growth will be aided by recent tax cuts, improved job circumstances, moderated inflation, and robust agricultural output following a strong monsoon, according to Malhotra.
RBI Monetary Policy Meeting Highlights
On 7 February 2025, RBI lowered its benchmark interest rate by 25 basis points. Since February 2023, the RBI had maintained the short-term lending rate, or repo rate, at 6.5%. In May 2020, during the COVID-19 pandemic, the RBI last lowered the rate. It was then progressively increased to 6.5%.
Beginning on Wednesday, Sanjay Malhotra, the recently appointed governor of the Reserve Bank, presided over his first meeting as head of the Monetary Policy Committee (MPC). In an effort to reduce retail inflation and slow growth, the MPC unanimously decided to lower the repo rate by 25 basis points, from 6.50% to 6.25%, marking the first revision in two years.
The rate drop coincides with the Rupee’s ongoing decline due to pressure from international trade disputes. Additionally, the MPC unanimously agreed to maintain the “neutral” approach and to continue to be unwaveringly focused on a long-term alignment of inflation with the goal, while endorsing growth.
RBI MPC Meeting February 2025 Key Details
- A 25 BPS drop to 6.25% will spur GDP as 2025–2026, GDP is predicted to expand 6.7%, mostly due to investment and consumption.
- In 2025–2026, inflation is expected to be 4.2%, unless there are significant surprises.
- Global issues, such as trade policy, financial instability, and geopolitics, continue to be major worries.
- Maintaining a neutral posture enables adaptability to shifting circumstances.
- Additional Modifications: Rate for the Standing Deposit Facility (SDF): 6.00%
- Bank rate and MSF rate: 6.50%
- The rebound in private spending is expected to fuel India’s economic growth in 2024–2025, with GDP growth estimated at 6.4% YoY (Q1–6.7%, Q2–7.0%, Q3 & Q4–6.5% each).
- Due to declining food prices, inflation decreased from 6.2% in October 2024 to lower levels in November and December 2024.
- CPI inflation forecasts for 2024–2025: 4.8% (Q4: 4.4%); forecasts for 2025–2026: 4.2%
Weaker Growth, Easing Inflation
India’s government predicted 6.4% annual growth for the year ending in March, which was lower than the lower end of its original estimate due to slower corporate investments and a weaker manufacturing sector. In four years, that would be the slowest rate of growth. On Friday, the central bank predicted that next year’s growth will be 6.7%.
Inflation, according to RBI, will average 4.8% in the current fiscal year and 4.2% the next year. Although Malhotra stated that food inflation pressures should subside, he also noted that the inflation forecast is at danger due to fluctuating global energy costs. According to Malhotra, a former senior officer in the federal ministry of finance, the tax cuts the Indian government proposed in its budget last week would not cause inflation.
Repo rate cut to 6.25 Percent
For the first time in over 5 years, RBI has announced a 25 basis point fall in the repo rate, bringing it down to 6.25%. The Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, unanimously adopted this decision, which takes into account the changing economic landscape in the face of international uncertainty.
It is expected that borrowing rates for commercial and retail loans would decrease as a result of the repo rate drop. Interest rate changes may occur for personal loans, home loans, and other floating-rate borrowings that are correlated with the repo rate. This decision is important for borrowers since, as of October 2019, all retail floating-rate loans are linked to an external benchmark, mainly the repo rate.
What is Next for Monetary Policy
To balance controlling inflation and promoting growth, the RBI has shifted to a less restrictive monetary policy. Industry insiders and analysts will be keenly monitoring any more policy changes in reaction to economic data. How well the repo rate decrease stimulates demand, enhances liquidity, and promotes growth will depend on how banks modify lending rates and how customers react to evolving borrowing circumstances.
Discussions on how the RBI’s move to cut the repo rate may affect lending, economic activity, and financial markets have been more prevalent. The action offers debtors respite, but it also indicates shifting economic conditions that need careful monitoring.
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