The long-awaited relief from high interest rates has finally arrived. The Reserve Bank’s Monetary Policy Committee has cut its repurchase or repo rate by 25 basis points to 6.25 percent. The decision to lower the rate—coming with the backdrop of moderating growth, rising global uncertainties and easing inflationary pressures—is expected to spur household consumption and investment. Headline inflation is hovering above the RBI’s 4 percent target and will likely stay above in the next fiscal too. But as Governor Sanjay Malhotra noted, the need to remain supportive of growth moved the rate cut needle. However, he maintained the policy stance at neutral, allowing himself flexibility to change rates in the future to suit the evolving macroeconomic conditions. So it’s not a sure sign of the commencement of a rate easing cycle, though analysts expect a series of cuts to the tune of 50-75 bps next fiscal.
Real GDP growth for 2025-26 is projected at 6.7 percent, in line with the estimates provided by the latest Economic Survey at 6.3-6.8 percent, while the inflation estimate is lowered to 4.2 percent. It means that, like the current fiscal, 2025-26 will likely see the Indian economy growing below its 7-8 percent potential, while price rise will remain above the central bank’s 4 percent target. The biggest challenge is global uncertainty and its impact on the domestic economy as a trade war could adversely affect India’s growth, inflation and trade dynamics. On the regulatory front, Malhotra noted that while strengthening and enhancing the regulatory framework was necessary, there was a need to strike a balance between stability and efficiency. On Friday, the central bank announced no explicit regulatory measures—except to stagger new norms for infrastructure projects and digitally-linked deposits—which is an acknowledgement that the recent tightening may have been a tad too strict.
Meanwhile, relentless selling by foreign investors and a weakening rupee are complicating RBI’s job of managing inflation and growth. As for liquidity, Malhotra assured timely measures to ensure comfortable conditions. But market participants were clearly disappointed with the absence of new liquidity measures on Friday. Analysts, however, reckon that liquidity announcements need not all be taken at the policy review. The central bank can always act when the need arises.