In a long-awaited move, the Reserve Bank of India (RBI) announced a 25 basis point cut in the repo rate on Friday. The decision, made by the monetary policy committee (MPC), aims to provide relief on interest rates and support India’s economic growth, according to experts.
The RBI reduced the repo rate, the interest rate at which the central bank lends money to commercial banks, for the first time since May 2020. The new rate stands at 6.25%.
Dharmakirti Joshi, Chief Economist at Crisil Limited, explained that the MPC’s decision came as expected, driven by the easing of consumer price index (CPI) inflation and the ongoing need to support economic growth.
Despite the rate cut, the MPC maintained a ‘neutral’ policy stance. This neutral stance allows the RBI flexibility to remain data-dependent and adapt to future economic conditions, Joshi noted. He added that the central bank’s future moves will largely depend on domestic inflation trends.
Impact On India’s GDP Growth
Joshi emphasized that elevated interest rates had been affecting India’s GDP growth. Experts view the government’s budget for the next financial year, which expect to mildly support growth and continue fiscal consolidation, as a step in the right direction, especially with the rate cut.
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He expressed optimism that the MPC might cut the repo rate by an additional 75 to 100 basis points in the upcoming financial year to further boost economic momentum.
Future Outlook And Market Reactions
Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, echoed Joshi’s sentiment and note that the RBI’s decision to reverse the interest rate cycle widely anticipated. He pointed out that the GDP growth forecast for the current fiscal year was revised downwards to 6.4% from 6.6%. For the next fiscal year, he projected GDP growth to be around 6.7%.
Kulkarni also suggested that the MPC could implement another 25 basis point rate cut in upcoming meetings, continuing its supportive stance on economic growth.
As the RBI adapts to changing economic conditions, all eyes will remain on future policy decisions to gauge how they impact India’s growth trajectory.
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