RBI Cuts Repo Rate to 6.25% in February 2025: First Rate Cut in 5 Years to Boost Economic Growth
The RBI lowered the repo rate by 25 basis points to 6.25% as its Monetary Policy Committee sat during the last week of February 2025. It is the central bank’s rate cut in five years, last done in May 2020. The repo rate, previously 6.5%, is the interest rate at which the RBI loans money to commercial banks.
The rate cut is meant to accelerate economic activity by making loans more affordable. This came after the government lowered personal income tax in a bid to boost consumption. The RBI, however, chose to keep a “neutral” stance, which means it will be ready to shift its policies as the economic condition continues to change.
RBI Governor Sanjay Malhotra clarified that the existing architecture has served to tame inflation effectively ever since it has been introduced, particularly after the pandemic. RBI will go on fine-tuning its methods with the aid of fresh data and enhanced forecast models to effectively act on changes in growth and inflation.
As regards global conditions, uncertainty prevails due to trade tensions, specifically the US tariffs against Canada, Mexico, and China. The dollar has strengthened, which adds to global volatility.
The RBI has projected GDP growth at around 6.7% in the forthcoming fiscal year, a hair’s breadth over the government’s estimate of 6.3-6.8%. India’s economy, however, is projected to grow at 6.4% in 2024-25, its weakest in four years.
Inflation is likely to be 4.2% in the coming fiscal year, and it will ease in the coming months. Retail inflation, which was 5.22% in December, is likely to come down further. The MPC noted that inflation has been softening and that the food price outlook is favorable. Previous monetary policies have also been beneficial in softening inflation.
Impact of Repo Rate Cut
When the RBI reduces the repo rate, the banks reduce the lending rates. This makes the loans cheaper for the borrower, reducing equated monthly instalments (EMIs) of loans.
Prevention of Cyber Frauds
Another problem being tackled by Governor Malhotra is cyber frauds. This comprises extra security for international online payments and development of special domains for Indian banks that lowers the risk in the digital world.
Forex Market
For the RBI, the policy of intervention in the foreign exchange market for the purpose of stabilizing unduly high volatility is continued but not to the level of an exchange rate target. The determination of the rupee value is considered to be through market forces.
Other notable comments of the RBI Governor are: Malhotra assured stakeholders that while formulating new regulations, the RBI would continue to take them into confidence. Also, in the implementation of the regulations, especially large ones, the RBI would provide smooth transitions.
On the economic front of the world, Malhotra informed that the world economy is expanding below potential with ongoing trade uncertainties and service price inflation. He informed risks emanating from volatility in global financial markets and unfavorable weather conditions affecting growth and inflation in India. The RBI is utilizing all tools to counter these issues and stabilize the economy.
In summary, the RBI’s recent actions indicate a determination to foster growth while keeping inflation in check despite the uncertainties in the world.
Source : TheIndianExpress