RBI Implements First Rate Cut in Five Years: Key Highlights from the February 2025 Monetary Policy

Email : 126k 12k

In a significant move to stimulate economic growth, the Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points (bps), bringing it down to 6.25%. This decision, announced during the February 2025 Monetary Policy Committee (MPC) meeting, marks the first rate cut in nearly five years.

Context and Decision

The MPC, under the leadership of newly appointed RBI Governor Sanjay Malhotra, unanimously agreed to lower the policy repo rate from 6.50% to 6.25%. The committee also maintained a neutral monetary policy stance, emphasising a commitment to aligning inflation with target levels while supporting economic growth.

Governor Malhotra highlighted that inflation is aligning with the RBI's targets, providing room for policy easing. The decision comes amid concerns over a slowdown in economic momentum and signs of inflation approaching the 4% target.

Key Takeaways from the Policy Announcement

Rate Reduction After a Prolonged Pause

The 25 bps cut brings the repo rate to 6.25%, the first reduction since May 2020. This move aligns with market expectations and reflects the RBI's shift towards a more accommodative policy stance to address slowing economic growth.

Economic Growth Projections

The RBI projects real GDP growth for the fiscal year 2025-26 at 6.7%, with the current fiscal year's growth estimated at 6.4%, down from the previous projection of 6.6%. The downward revision considers global headwinds and domestic economic indicators.

Inflation Outlook

Inflation is expected to gradually approach the RBI's target of 4%. The central bank forecasts Consumer Price Index (CPI) inflation for 2024-25 at 4.8%, with a further decline to 4.2% in 2025-26, assuming normal monsoon conditions and stable commodity prices.

External Sector Resilience

Governor Malhotra emphasised the resilience of India's external sector, noting a moderation in the current account deficit and robust foreign exchange reserves, which stood at $630.6 billion as of January 31, 2025, providing an import cover of over 10 months.

Liquidity Management

The RBI acknowledged tighter liquidity conditions in recent months due to factors like advance tax payments and increased currency circulation. The central bank is committed to ensuring adequate liquidity in the system and will take necessary measures to maintain orderly market conditions.

Implications for the Economy

The rate cut is anticipated to lower borrowing costs for businesses and consumers, potentially stimulating investment and consumption. Sectors such as real estate, automobiles, and banking are expected to benefit from reduced interest rates, which could lead to increased demand and economic activity.

Financial markets responded positively to the announcement, with key indices witnessing gains driven by rate-sensitive stocks. The Nifty 50 index rose by 0.35% to 23,684.2, while the BSE Sensex gained 0.28% to 78,274.35.

Conclusion

The RBI's decision to cut the repo rate after a prolonged pause reflects a strategic move to support economic growth amid easing inflationary pressures. By maintaining a neutral stance, the central bank retains flexibility to respond to evolving economic conditions. Stakeholders will closely monitor the impact of this policy shift on various sectors and the broader economy in the coming months.