By The Sampadak Express
The Reserve Bank of India (RBI) on Friday reduced the repo rate by 25 basis points to 6.25%, marking the first rate cut in five years. The last such cut occurred in May 2020. The move aims to boost economic activity by making borrowing cheaper, which is expected to encourage investment and spending.
The RBI’s Monetary Policy Committee (MPC) unanimously decided on the cut, while maintaining a “neutral” stance on economic policy. RBI Governor Sanjay Malhotra explained that this neutral stance allows flexibility to respond to evolving macroeconomic conditions. The framework has helped India maintain lower inflation since its introduction, even during the pandemic.
The RBI also revised its GDP growth forecast for FY26 to 6.7%, signaling recovery after a slowing economy in FY25, which is expected to grow at just 6.4%. The government had previously projected a growth rate of 6.3-6.8% for FY26, driven by a strong external account, fiscal consolidation, and stable private consumption.
On inflation, the RBI projected retail inflation for FY26 at 4.2%, with quarterly expectations ranging from 3.8% to 4.5%. CPI inflation fell to 5.22% in December, driven by lower food prices. The RBI expects inflation to align with its target in FY26, thanks to favorable food inflation and past monetary policy actions.
The reduction in the repo rate will likely lead to lower interest rates on loans tied to external benchmarks, reducing equated monthly installments (EMIs) for borrowers. Additionally, the cut may prompt lenders to adjust rates on loans linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of previous rate hikes had not occurred.
Governor Malhotra assured that the RBI would continue to consult stakeholders before major decisions and implement regulations smoothly, providing adequate transition time. He acknowledged global economic challenges, including trade uncertainties and inflation, but emphasized India’s resilience.
Malhotra highlighted risks such as volatility in global financial markets, geopolitical tensions, and adverse weather, which could impact growth and inflation. Despite these, India’s economy remains strong, with the RBI actively managing global headwinds.
