RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?

The RBI has cut the repo rate by 25 basis points to 6.25% for the first time in five years to support economic growth. The move aims to ease borrowing costs amid stable inflation, with GDP growth projected at 6.7% for FY 2025-26. While borrowers may benefit, market reactions were mixed, reflecting global uncertainties.

 

CONTENTS:

• RBI Cuts Repo Rate for the First Time in Nearly Five Years to Boost Growth
• RBI MPC Meeting 2025: RBI Lowers Repo Rate by 25 Basis Points to 6.25%, Projects FY26 GDP Growth at 6.7%
• RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?

 

RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?

RBI Cuts Repo Rate for the First Time in Nearly Five Years to Boost Growth

RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move? The Reserve Bank of India (RBI) has lowered its key repo rate for the first time in nearly five years in an effort to stimulate economic growth. The RBI’s Monetary Policy Committee (MPC) unanimously decided to reduce the repo rate by 25 basis points, bringing it down from 6.5% to 6.25%. This announcement was made by RBI Governor Sanjay Malhotra in his first major address since assuming office.

The MPC, which consists of three RBI officials and three external members, had last cut the repo rate in May 2020 and had maintained it at the same level across the last 11 policy meetings.

Governor Malhotra highlighted that the global economic environment remains challenging, with growth falling below historical averages. However, he noted that high-frequency indicators suggest resilience in the global economy. While India is not entirely shielded from global economic pressures, he emphasized that the country’s economy remains strong and resilient.

He also pointed out that with diminishing expectations regarding the magnitude and speed of rate cuts in the U.S., bond yields and the dollar have strengthened.

 

RBI MPC Meeting 2025: RBI Lowers Repo Rate by 25 Basis Points to 6.25%, Projects FY26 GDP Growth at 6.7%

RBI Monetary Policy Meeting Announcements – The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points to 6.25%, marking the first rate cut in five years. Prior to this decision, the rate had remained at 6.5%. The move comes shortly after the central government reduced personal income tax to encourage consumer spending.

During the announcement on Friday, RBI Governor Sanjay Malhotra stated that the six-member Monetary Policy Committee (MPC) had unanimously voted in favor of the rate cut to promote economic growth by lowering borrowing costs and stimulating investment and expenditure. The last time the RBI had reduced the repo rate was in May 2020, and it had remained unchanged for the past two years.

Governor Malhotra highlighted that average inflation has remained lower since the adoption of the monetary policy framework. While India’s economy remains strong, he acknowledged that it is not entirely insulated from global economic challenges.

 

Impact of the Rate Cut

RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?  The decision comes amid global uncertainties, including U.S. President Donald Trump’s announcement of tariffs on Canada, Mexico, and China. While tariffs on Canada and Mexico have been temporarily delayed, concerns about a potential global trade war have led to fluctuations in currency markets. Earlier in the week, the Indian rupee fell to an all-time low of 87 against the U.S. dollar but recovered by 16 paise to 87.43 in early trade on Friday.

A reduction in the repo rate typically leads to a decrease in external benchmark lending rates (EBLR), providing relief to borrowers by lowering their equated monthly installments (EMIs). Banks may also reduce interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR), though the full transmission of previous repo rate hikes between May 2022 and February 2023 has not yet been realized.

 

GDP and Inflation Projections

RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?  The RBI has projected India’s GDP growth for the fiscal year 2025-26 at 6.7%. Additionally, the MPC has estimated retail inflation to be around 4.2% for the same period.

According to the Economic Survey released ahead of the Union Budget, the government anticipates GDP growth in the range of 6.3% to 6.8% for FY26, citing factors such as a robust external account, measured fiscal consolidation, and stable private consumption. This projection follows an estimated economic growth rate of 6.4% in 2024-25, the slowest in four years.

 

RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?

RBI Cuts Repo Rate to 6.25%: A Timely Boost or Premature Move?  This repo rate cut by 25 basis points to 6.25% marks a significant shift in RBI’s monetary policy, being the first rate cut in five years. It aligns with easing inflation and a focus on supporting growth. The projected GDP growth of 6.7% for FY 2025-26 suggests cautious optimism about economic recovery.

 

A few key takeaways:

• Impact on borrowers: This cut is good news for loan borrowers as EMIs on home, car, and personal loans may decrease. However, banks’ pace of passing on the benefit remains to be seen.
• Stock Market Reaction: Despite expectations of the rate cut, the markets (Sensex & Nifty) reacted negatively, likely due to concerns over economic growth or global factors.
• Inflation Outlook: CPI inflation is projected at 4.2% for FY 2025-26, which, if stable, may give RBI more room for further cuts later.
• Exchange Rate & Liquidity: RBI maintains a neutral stance on the rupee, avoiding direct interventions while ensuring liquidity buffers are adequate.

 

Do you think this move was timely, or should RBI have waited for more economic clarity?