The Reserve Bank of India (RBI) has announced a 25 basis points cut in the repo rate, bringing it down to 6.25% at its first monetary policy meeting of 2025, held from February 5 to 7. Governor Sanjay Malhotra, leading his inaugural policy review, emphasized the need to support economic growth while keeping inflation in check.
Economic Context: Growth vs. Inflation
India’s economy is facing a delicate balancing act. While growth has slowed to a four-year low, inflation remains above the RBI’s comfort level of 4%. The rupee has weakened against the US dollar, putting further pressure on import-driven inflation, particularly in oil and essential commodities.
A recent Reuters poll found that 45 out of 62 economists expected the RBI to cut the repo rate by 25 basis points, which has now been confirmed. This move is expected to provide relief to businesses and borrowers but also carries the risk of fueling inflation if not managed carefully.
Fiscal Considerations
The Indian government has projected a fiscal deficit of 4.8% of GDP for the current year, with expectations of improvement to 4.4% in 2025-26. Economic growth for the next fiscal year is expected to be in the range of 6.3% to 6.8%, slightly higher than the 6.4% seen this year.
The RBI has already taken steps to manage liquidity, injecting 1.5 trillion rupees into the banking system in late January. Some analysts suggest that, in addition to the rate cut, the central bank may consider reducing the cash reserve ratio (CRR) to further support credit growth.
What to Expect Going Forward?
- Impact of Rate Cut: The rate cut is expected to boost economic activity, particularly in the real estate and auto sectors, by lowering borrowing costs.
- Further Liquidity Measures: Additional liquidity injections or adjustments in CRR could be considered to support economic recovery.
- Guidance on Inflation and Growth: The RBI’s commentary on inflation trends and future growth projections will be critical for market sentiment.
Market Reactions and Investor Sentiment
Stock markets responded positively to the rate cut, with key indices rallying on expectations of improved liquidity and borrowing conditions. Bond yields dropped, reflecting the easing monetary stance, while the rupee showed mixed reactions given inflationary concerns.
Conclusion
Governor Malhotra’s first policy review has set the tone for the RBI’s monetary approach in 2025. The decision to cut rates highlights the central bank’s commitment to supporting growth while keeping a watchful eye on inflation. Investors, businesses, and policymakers will now closely monitor how the RBI navigates the evolving economic landscape in the coming months.
