RBI Policy Meeting 2025 Highlights: RBI delivers first rate cut in nearly 5 years, pegs GDP growth in FY26 at about 6.7%
Himanshu Kapadia
Strategic Financial Mapping| Empowering Financial Aspirations for Corporate Employees, Business Leaders, and Families| Holistic Financial Design| Retirement Solutions| Goal-Based Investing
Synopsis
On February 7, 2025, the Reserve Bank of India (RBI) announced a 25 basis points reduction in the repo rate, bringing it down to 6.25%. This marks the first rate cut in nearly five years, with the previous reduction occurring in May 2020.
Rationale Behind the Rate Cut
The decision to lower the repo rate was driven by a combination of slowing economic growth and easing inflationary pressures. India's Gross Domestic Product (GDP) growth has decelerated to 5.4%, prompting concerns about the country's economic momentum. In response, the government has projected a growth rate of 6.4% for the current fiscal year, aiming to revitalize the economy.
Inflation has also shown signs of moderation, decreasing to a four-month low. This downward trend in inflation provided the RBI with the necessary leeway to implement a rate cut to stimulate economic activity.
Market Reactions
The financial markets responded positively to the RBI's announcement. Interest rate-sensitive sectors, such as financials, automobiles, and real estate, experienced gains. The Nifty 50 index rose by 0.35% to 23,684.2, while the BSE Sensex increased by 0.28% to 78,274.35. Notably, auto stocks climbed by 1%, and real estate stocks surged by 1.5%.
Currency Impact
Despite the rate cut, the Indian rupee remained relatively stable. It ended the day up 0.2%, closing at 87.4250 against the U.S. dollar. However, the rupee faced challenges earlier in the week due to global trade concerns and foreign portfolio outflows, marking its worst weekly performance since December 2022.
Future Outlook
The RBI's Monetary Policy Committee (MPC) has projected India's GDP growth for the upcoming fiscal year at approximately 6.7%. The growth estimates for the first and second quarters are 6.7% and 7%, respectively, while the third and fourth quarters are both projected at 6.5%. Inflation is expected to decline to 4.2% in the next fiscal year from the current 4.8%.
This rate cut signifies a strategic shift in the RBI's monetary policy, emphasizing support for economic growth while maintaining a close watch on inflation dynamics.
RBI Implements First Rate Cut in Five Years Amid Slowing Growth
Source : https://tinyurl.com/5ajmk58f