Following significant tax relief for the middle class, the Reserve Bank of India (RBI) has now delivered another favorable move by lowering the cost of borrowing. During the recent three-day Monetary Policy Committee (MPC) meeting, RBI Governor Sanjay Malhotra announced a 0.25 percent reduction in the repo rate, bringing it down to 6.25 percent. This unanimous decision by the six-member committee marks the first rate cut in nearly five years, maintaining the central bank’s ‘neutral’ stance. Until now, the repo rate had remained stable at 6.50 percent for the last two years.
Historical Context of Repo Rate Adjustments
The last instance of a repo rate reduction was in May 2020, when the RBI slashed it by 0.40 percent to four percent in response to the COVID-19 pandemic. However, to counter risks arising from the Russia-Ukraine conflict, the central bank initiated a rate hike cycle in May 2022, which continued until February 2023.
Economic Growth and Inflation Projections
The RBI has projected a 6.7 percent economic growth rate for the upcoming financial year, slightly higher than the 6.4 percent estimate for the current year. Meanwhile, retail inflation is expected to moderate to 4.2 percent in the next fiscal year, compared to 4.8 percent this year.
Regarding inflation trends, Governor Malhotra highlighted that food inflation is anticipated to ease with the arrival of new crop supplies. While India’s economy remains robust, it continues to face external pressures from global economic uncertainties. He also pointed out that since implementing the monetary policy framework, average inflation has remained under control.
Pandemic-Era Relief and Policy Adjustments
During the COVID-19 pandemic, the RBI provided monetary relief by slashing the repo rate to four percent in May 2020. However, as inflationary pressures mounted due to geopolitical tensions, the central bank resumed rate hikes in May 2022, concluding the tightening cycle in February 2023.
MPC Review and Interest Rate Announcement
The three-day MPC review meeting, which began on Wednesday, culminated in the much-anticipated interest rate announcement on Friday. This meeting also marked the first bi-monthly policy review under the leadership of newly appointed RBI Governor Sanjay Malhotra, who took over the role in December following the completion of Shaktikanta Das’s six-year tenure.
Expert Opinions and Market Reactions
Leading economists and financial experts had widely anticipated the rate cut. Radhika Rao, a senior economist at DBS Group Research, stated that the MPC was expected to unanimously vote in favor of reducing the repo rate to 6.25 percent. Similarly, global research firm Bank of America Global Research pointed out that economic growth and inflation trends justified the need for a more accommodative monetary policy.
Industry body Assocham also projected that the policy rate would be lowered to 6.25 percent, aligning with market expectations. A report from SBI Research supported this forecast, indicating that a 0.25 percent reduction in the repo rate was a likely outcome of the monetary review.
Conclusion
The RBI’s decision to cut the repo rate provides much-needed relief to borrowers, particularly in the middle class, by making loans more affordable. With economic growth projections remaining strong and inflation appearing to be under control, the move aims to balance monetary stability while ensuring economic momentum. Financial experts and industry stakeholders largely agree that this rate cut is a prudent step towards fostering growth and financial ease in the current economic landscape.