The repo rate, or the rate at which the RBI loans to other banks, was lowered by 25 basis points to 6.25% on Friday by the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC). This is the first rate cut initiated by the RBI in five years, the last one being in May 2020. As of right now, the repo rate was 6.5%. The move comes barely a week after the Centre lowered personal income tax to promote consumption.
In an attempt to boost economic activity by making borrowing more affordable, the RBI’s MPC unanimously decided to decrease the repo rate, which in turn encouraged investment and spending. However, the MPC chose to stick with its “neutral” economic approach, which RBI Governor Sanjay Malhotra indicated would give them flexibility in responding to the changing macroeconomic landscape.
Malhotra claimed that average inflation has decreased since the framework’s adoption and that it has performed well for the Indian economy over the years, even during the extremely difficult time following the pandemic. He added that since the introduction of the framework, CPI has been largely aligned to the target, barring a few occasions of breaching the upper tolerance band.
According to the RBI Governor, the RBI and MPC will continue to use the flexibility built into the inflation targeting framework to improve macroeconomic outcomes in the economy’s best interest while responding to the changing growth-inflation dynamics. The RBI Governor also stated that the framework’s fundamental components will be further improved by developing more robust models, advancing the use of new data, and improving forecasting of important macroeconomic variables.
With US President Donald Trump putting tariffs on China, Canada, and Mexico, the policy is being announced in the midst of global unrest. A month has been added to the tariffs on Canada and Mexico. The dollar rose against other major currencies on Monday as a result of the tariffs, which have also sparked fears of international trade battles.
Approximately 6.7% GDP growth is projected by the central bank for the upcoming fiscal year, Governor Sanjay Malhotra declared. Approximately 6.7% GDP growth is projected by the central bank for the upcoming fiscal year, Governor Sanjay Malhotra declared.
The government, according to the Economic Survey that was released before the Budget, projected a growth rate of 6.3-6.8 per cent for 2025-26 on the back of a “strong external account, calibrated fiscal consolidation and stable private consumption”. This occurred against the backdrop of a faltering economy, predicted to grow at its slowest rate in four years, 6.4%, in 2024–2025.
While maintaining its prediction for 2024–2025 at 4.8%, the Reserve Bank has set retail inflation at 4.2% for the upcoming fiscal year starting in April. “Assuming a normal monsoon next year, CPI inflation for 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent,” the Governor said, while adding that risks were evenly balanced.
In December, CPI-based inflation fell to a four-month low of 5.22 percent, mostly due to a decrease in the cost of vegetables and other food basket items. In November, it was 5.48 percent. “MPC noted that inflation has declined, supported by a favourable outlook on food and continued transmission of past monetary policy action. It is expected to further moderate in 2025-26, gradually aligning with the target. The MPC also noted that while growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. This growth-inflation dynamic opens up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target,” Malhotra said.
All external benchmark lending rates (EBLR) that are tied to the repo rate will decrease when the RBI lowers the repo rate, which will benefit borrowers by lowering their equated monthly installments (EMIs). In cases where the full transmission of a 250 basis point increase in the repo rate between May 2022 and February 2023 has not occurred, lenders may also lower interest rates on loans that are tied to the marginal cost of fund-based lending rate (MCLR).
The governor of the RBI also outlined the steps the central bank is doing to combat cybercrimes. “Rapid digitalisation of financial services has brought convenience and efficiency, but has also increased exposure to cyber threats and digital risks that are progressively getting sophisticated,” Malhotra said.
The implementation of “bank.in” exclusive Internet domains for Indian banks and “fin.in” domains for the rest of the financial sector are two measures he also announced the RBI had taken to prevent such frauds: an extension of the additional factor of authentication to online international digital payments made to offshore merchants.
The RBI’s exchange rate policy over the years has remained consistent and its stated objective is to maintain orderliness and stability without compromising forex market efficiency, Sanjay Malhotra said. He added, “The RBI’s intervention in the forex market is focused on smoothening excessive and disruptive volatility, and it does not target any exchange rate level or band. The exchange rate of the Indian rupee is determined by market forces.”
All parties were also reassured by Sanjay Malhotra that the central bank will stick to the consultative procedure it has been using for years when creating regulations. He went on to say that before making any significant decisions, the opinions of stakeholders are important and will be taken into account.
According to Malhotra, the RBI would make sure that the implementation of such regulations goes smoothly and that enough time is allowed for the transition. In cases where the regulations have significant ramifications, the implementation will be carried out gradually.
The RBI Governor discussed the current state of the economy, stating that although high frequency indicators point to resilience and ongoing trade growth, the global economy is currently expanding below the historic average. “Progress on global disinflation is stalling, hindered by services price inflation,” he added.
He added that as expectations about the scope and speed of rate cuts in the US have decreased, the dollar has gotten stronger, bond yields have gotten harder, and emerging market economies have seen significant capital flight, which has caused their currencies to depreciate sharply and tighten financial conditions. “Divergent trajectory of monetary policy across advanced economies lingering geopolitical tensions, and elevated trade and policy uncertainties have exacerbated financial market volatility. Such an uncertain global environment has posed uncertain policy trade-offs in emerging market economies,” he added.
The governor added that although the Indian economy is still robust and resilient, it has not been immune to external challenges, as evidenced by the rupee’s recent fall. “RBI has been applying all tools at its disposal to face the multi-pronged challenges,” he added.
Speaking about the risks facing the economy, Malhotra stated that the MPC believed that the growth and inflation forecasts were at risk due to the extreme volatility of international financial markets, ongoing uncertainty surrounding international trade policy, and unfavorable weather events.
