The Reserve Bank of India announced a long-anticipated interest rate cut on Friday, marking its first reduction in nearly five years. As inflation continues to cool, the central bank has found room to stimulate the country’s slowing economy. The Monetary Policy Committee decided to lower the benchmark repo rate by 25 basis points to 6.25 percent, a move confirmed by Reserve Bank of India Governor Sanjay Malhotra in a livestreamed address.
This decision marks the first rate cut since May 2020, when the country was grappling with the economic downturn caused by the COVID-19 pandemic. Analysts believe this signals a shift in the central bank’s focus from inflation containment to economic growth support. According to Shilan Shah, deputy chief emerging markets economist at Capital Economics, the rate cut is just the beginning of an easing cycle, with further reductions expected in the coming months. Shilan Shah forecasts that the Reserve Bank of India may introduce an additional 75 basis points of cuts.
Along with the rate cut, the central bank has revised its economic projections. The real gross domestic product growth forecast for the next fiscal year has been set at 6.7 percent, while inflation is expected to hover at 4.2 percent. However, for the current fiscal year ending in March, the Reserve Bank of India downgraded its gross domestic product forecast from 6.6 percent to 6.4 percent, marking the slowest growth in four years. Inflation expectations for the fiscal year remained unchanged at 4.8 percent.
Indian stock markets reacted negatively to the announcement, with the benchmark Nifty 50 index declining by 0.5 percent. The yield on 10-year government bonds rose by over four basis points to 6.7 percent. Meanwhile, the six-member Monetary Policy Committee unanimously decided to maintain a “neutral” policy stance, surprising market analysts who had anticipated a shift to an “accommodative” stance to further boost economic activity.
While economic growth is expected to recover from the low recorded in the second quarter, Sanjay Malhotra noted that it remains significantly below last year’s levels. India’s consumer price inflation has moderated from its peak in October, remaining within the central bank’s 6 percent tolerance limit, with December’s rate at 5.22 percent and November’s at 5.48 percent.
Despite the Reserve Bank of India’s efforts to stabilize the economy, concerns remain over potential impacts on the Indian rupee. The domestic currency has been facing record lows against the United States dollar, and further rate cuts could lead to higher inflation and capital outflows. Following the announcement, the rupee strengthened slightly to 87.47 against the dollar. Reports indicate that the Reserve Bank of India has been intervening in the foreign exchange market to cushion the currency against sharp declines and prevent sudden capital outflows.
