RBI Cuts Repo Rate By 25 Basis Points To Boost Economic Growth

In a bid to accelerate economic growth, Reserve Bank of India (RBI) Governor Sanjay Malhotra announced a 25 basis point reduction in the policy repo rate on Wednesday.

The rate is now reduced from 6.25% to 6%, and the RBI has also shifted its monetary policy stance from ‘neutral’ to ‘accommodative’.

The RBI’s Monetary Policy Committee (MPC) unanimously agreed to cut the repo rate, considering the current macroeconomic and financial conditions along with the economic outlook, Malhotra explained.

The rate cut aims to stimulate economic activity and support growth in the face of ongoing challenges.

Shift To Accommodative Stance To Spur Liquidity and Economic Activity

The Governor highlighted that the MPC’s decision to change the monetary policy stance to ‘accommodative’ would help further ease monetary policy by injecting more liquidity into the financial system.

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This move replaces the previous ‘neutral’ stance, which aimed to neither stimulate nor restrict liquidity.

The accommodative stance will likely provide greater flexibility in boosting economic activity.

Inflation Under Control; Vigilance Continues

While acknowledging that inflation has moderated in the Indian economy, Malhotra emphasized that the RBI would remain vigilant due to global risks, particularly the potential impact of increased US tariffs.

Despite this, he assured that the RBI would continue to ensure adequate liquidity in the banking system.

Adjustments To Key Rates Post-Repo Rate Cut

Following the repo rate cut, Malhotra confirmed changes to other key rates under the RBI’s liquidity adjustment facility.

The Standing Deposit Facility (SDF) rate will now be 5.75%, while the Marginal Standing Facility (MSF) rate and the bank rate will both be adjusted to 6.25%.

This marks the second consecutive 25 basis point reduction in the repo rate, following a similar move in February, the first such cut since May 2020.

Impact On Borrowing And Economic Growth

A lower policy rate is likely to reduce interest rates on bank loans, making borrowing easier for consumers and businesses alike.

This should encourage higher consumption and investment, potentially leading to faster economic growth.

However, the effectiveness of this rate cut will depend on how quickly commercial banks pass on the benefits to borrowers.

Revised GDP Growth Forecast

In addition to the rate cut, Malhotra also announced a revision in the RBI’s GDP growth projection for the Indian economy, lowering it to 6.5% for the current fiscal year, down from the previous forecast of 6.7%.

The revised growth projection takes into account both domestic and global economic challenges.

Fiscal Policy Adjustments Complement Monetary Easing

The easing of the RBI’s monetary policy comes amid favorable fiscal developments.

The finance minister has maintained a commitment to fiscal consolidation, reducing the fiscal deficit target to 4.4% of GDP for the 2025-26 fiscal year, down from the earlier target of 4.8%.

This reduction in the fiscal deficit lessens the government’s need for market borrowing, thereby providing the RBI with more room to implement policies aimed at spurring economic growth.

A Coordinated Effort To Stimulate Growth

Overall, the RBI’s decision to cut the repo rate and adopt a more accommodative stance is to provide a boost to the Indian economy, supporting growth through enhanced liquidity and easier borrowing conditions.

With fiscal consolidation also underway, the stage is set for a coordinated effort to drive economic recovery and development.