The RBI reduced the repo rate by 25 basis points to 6.25% as its Monetary Policy Committee met in the last week of February 2025. It is the central bank’s first rate cut in five years, since May 2020. The repo rate, which earlier was 6.5%, is the rate at which the RBI lends money to commercial banks.
The rate cut aims to stimulate economic activity by making borrowing cheaper. This move follows the government’s decision to reduce personal income tax to encourage spending. Despite the rate cut, the RBI decided to maintain a “neutral” stance, meaning it will remain flexible to adjust its policies based on the changing economic environment.
RBI Governor Sanjay Malhotra explained that the current framework has helped manage inflation well since its introduction, especially post-pandemic. The RBI will continue refining its strategies by using new data and improving forecasting models to better respond to growth and inflation changes.
As far as global conditions are concerned, there is uncertainty because of trade tensions, particularly the US tariffs on Canada, Mexico, and China. The dollar has appreciated, which increases global volatility.
The RBI has estimated GDP growth at about 6.7% in the next fiscal year, just a tad above the government’s forecast of 6.3-6.8%. However, India’s economy is seen growing at 6.4% in 2024-25, its slowest in four years.
Inflation is expected to be 4.2% for the next fiscal year, and it is going to ease in the following months. Retail inflation, which stood at 5.22% in December, is expected to decline further. The MPC observed that inflation has been easing and that the outlook for food prices is positive. Past monetary policies have also been helpful in easing inflation.
Impact of Repo Rate Cut
When the RBI cuts the repo rate, the banks cut the lending rates. This results in loans becoming cheaper for the borrower, lowering equated monthly installments (EMIs) of loans.
Prevention of Cyber Frauds
Another issue being addressed by Governor Malhotra is cyber frauds. This includes additional security for international online payments and creation of special domains for Indian banks that reduces the risk in the digital world.
Forex Market
For the RBI, its policy to intervene in the foreign exchange market to stabilize excessive volatility is maintained but not to a target of an exchange rate. The value of the rupee is seen as being determined by market forces.
Other significant remarks from the RBI Governor include: Malhotra reassured stakeholders that when making new regulations, the RBI would continue to consult them. Additionally, during the implementation of the regulations, particularly major ones, the RBI would ensure smooth transitions.
On the global economic front, Malhotra stated that world economy is growing below average with continued trade uncertainties and inflation in services prices. He stated risks from global financial market volatility and adverse weather events that could impact growth and inflation in India. The RBI is employing all tools for counteracting these challenges and stabilizing the economy.
In conclusion, the RBI’s recent decisions reflect a commitment to supporting growth while managing inflation carefully, despite global uncertainties.