On Friday, the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) reduced the repo rate, the rate at which the RBI lends to commercial banks by 25 basis points, bringing it down to 6.25%.
This marks the first rate cut by the RBI in five years, following a two-year period of holding the rate steady. The last rate cut was made in May 2020.
The repo rate, till now, stood at 6.5 per cent.
The interest rate cut comes within a week of Finance Minister Nirmala Sitharaman in Budget 2025-26 providing the biggest-ever tax break to the middle class to boost consumption after the economy has slowed to its lowest pace since the pandemic.
This move is expected to benefit home and auto loan borrowers (especially those with variable rates), comes after a prolonged period of stable rates.
RBI Governor Sanjay Malhotra said that average inflation has remained lower since introduction of monetary policy framework. “Indian economy remains strong, though not immune to global challenges,” he added.
Malhotra announced that the central bank’s rate-setting panel will continue with its "neutral" monetary policy stance. This approach aims to balance inflation control and economic growth, he said.
In its latest projections, the RBI estimates the GDP growth for the next fiscal year at approximately 6.7%. The central bank also forecasted inflation for FY'25 at 4.8% and for FY'26 at 4.2%, in line with its target of keeping inflation under control.
Regarding inflation, the governor expressed confidence in the outlook, citing a significant decline in food prices since the arrival of winter crops.
If the kharif crop season goes as expected and there are no adverse weather surprises, the MPC is forecasting moderate inflation.
The central bank expects inflation to reach 4.8% by the end of this fiscal year, with the March quarter potentially seeing a dip to 4.4%. For fiscal year 2026, the price index is expected to continue moderating, with an anticipated range of 4.5% in Q1, 4% in Q2, 3.8% in Q3, and 4.2% in the final quarter.
Addressing concerns over the exchange rate, the RBI Governor emphasized that the central bank’s forex policy remains consistent, focusing on maintaining an orderly and stable market. He clarified that the RBI does not target any specific exchange rate.
The Governor also urged banks to move away from passively parking funds with the RBI and instead engage in more active trading among themselves.
On another note, the RBI Governor expressed concern over the rising instances of digital fraud, calling it a significant issue that requires immediate action from all stakeholders.
To combat cyber fraud, the RBI announced that banks will be required to use the exclusive domain name "fin.in" starting in April for all financial transactions.
He also announced plans to set up a working group to review the trading and settlement timings of regulated markets.
