RBI cuts repo rate to 6.25% after 57 months to boost growth
The Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 6.25%. It is the first time the central bank has reduced the rate in nearly five years. This decision has been made with the aim of stimulating economic growth since inflation trends toward the RBI's 4% target. The Monetary Policy Committee voted unanimously for the rate cut while maintaining a neutral monetary policy stance.
RBI Governor Sanjay Malhotra pointed out possible growth recovery on account of improving employment conditions, tax cuts, easing inflation, and robust agricultural output. India's bankers are negative about the rate cuts despite the reduction.
They feel it is unlikely to attract lending even after the rate cuts due to the liquidity squeeze that still persists. Liquidity, since mid-December 2024, has been in deficit and had risen to more than three trillion rupees in January 2025.
The feelings of the bankers are that substantial credit offtake cannot happen without liquida- between supplying of a sufficient amount of liquidity that would take 3-6 months as deposit pressures persist.
In reaction to the rate cut, state-run companies in India, such as REC, IIFCL, HUDCO, and SIDBI, will raise nearly $2 billion in bond sales early next week.
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Bond yields, however, were up, since the RBI was seen as silent on further liquidity measures. Since last month the RBI has injected almost 2 trillion rupees in the banking system, the mutual funds have been more keen on short duration high rated corporate bonds.
Governor Malhotra assured continued monitoring and proactive measures to ensure orderly liquidity conditions.
This happens just a week after the Union Budget for 2025-26, that aims to get growth moving with income tax relief worth ?1 lakh crore by stimulating urban demand.
The shift in the policy of RBI would mean cheaper home loans, auto loans, and other loans and is being considered to be part of support being given to slowly fading growth that is expected to ease to 4.4% in this quarter and to 4.2% in 2025-26.