The Reserve Bank of India (RBI) has announced a reduction in the repo rate, signaling a shift towards a more accommodative monetary policy. This announcement was made by Sanjay Malhotra, in his first major address as RBI Governor since assuming office in December last year. The decision, taken at the Monetary Policy Committee (MPC) meeting, reflects the central bank’s balancing act between supporting economic growth and maintaining price stability in the face of evolving domestic and global economic conditions.
The RBI has decided to lower the repo rate by 25 basis points, bringing it down from 6.5% to 6.25%. As a result, the Standing Deposit Facility (SDF) rate now stands at 6%, while the Marginal Standing Facility (MSF) rate and the Bank Rate have been adjusted to 6.50%. This move is expected to have a significant impact on the economy, particularly in terms of borrowing costs for businesses and consumers. A reduction in the repo rate typically leads to lower interest rates on loans, making it easier for businesses to access credit for expansion and for consumers to finance purchases, including homes and vehicles.
Commenting on the decision, Radhika Rao, Executive Director and Senior Economist at DBS Bank, stated that the MPC’s vote for a 25-basis-point cut was unanimous. She noted that the decision was driven by a cautious approach to economic growth, particularly as the winter disinflation in food prices is expected to keep inflation risks in check. She further highlighted that the RBI appears to be adopting a more flexible approach to inflation targeting, indicating that it may tolerate intermittent supply-driven volatility. This suggests that the central bank is prioritizing economic expansion while remaining watchful of inflationary pressures. The GDP forecasts released alongside the monetary policy decision indicate that India’s growth rate is expected to remain below 7% in both the current and the following fiscal years, reflecting the challenges posed by external uncertainties and domestic economic conditions.
With the repo rate cut in place, the RBI has projected real gross domestic product (GDP) growth at 6.7% for the financial year 2025-26. The central bank’s optimism stems from an expected recovery in industrial activity, robust household consumption, and a generally positive business sentiment. These factors are expected to contribute to sustained economic growth, despite some headwinds from global economic volatility. The quarterly projections for GDP growth suggest a steady pace of expansion, with the economy maintaining a trajectory that supports job creation, investment, and overall economic stability.
A direct consequence of the repo rate cut will be lower interest rates on home loans, which is expected to provide much-needed relief to homebuyers. This development comes as a boost to the real estate sector, which has been witnessing steady demand in recent months. With borrowing costs set to decline, demand for housing is likely to rise, benefitting both end-users and investors. Lower home loan rates will not only make homeownership more affordable but could also encourage real estate developers to ramp up construction activity, thereby supporting employment and growth in the allied sectors of cement, steel, and other construction materials.
On the inflation front, the RBI noted that headline inflation had eased in the months of November and December 2024, following a peak of 6.2% in October. The central bank remains cautiously optimistic about the inflation trajectory, expecting core inflation to remain moderate in the coming months. However, it acknowledged that uncertainties persist, particularly due to global financial market volatility, adverse weather conditions that could impact agricultural output, and fluctuations in energy prices. These factors pose potential risks to the inflation outlook, requiring close monitoring. Assuming normal monsoon conditions, the RBI has projected Consumer Price Index (CPI) inflation at 4.2% for the financial year 2025-26. The central bank’s quarterly CPI inflation projections indicate a gradual moderation in price pressures, which should provide some relief to consumers while maintaining overall economic stability.
Despite the decision to cut the repo rate, the RBI has chosen to retain a neutral stance on monetary policy, reflecting a measured approach in response to the complex global and domestic economic landscape. Geopolitical tensions, the slow pace of disinflation worldwide, and uncertainties in policy environments continue to influence the RBI’s decision-making process. The central bank remains committed to supporting growth while ensuring that inflation remains within manageable limits. By maintaining a neutral stance, the RBI signals that while it is open to further policy adjustments if needed, it will continue to assess macroeconomic conditions before making any further changes to interest rates.
In addition to its monetary policy measures, the RBI has announced a new initiative aimed at enhancing women’s role in financial decision-making and household budgeting. The campaign, titled "Financial Literacy: Women’s Prosperity," will be launched on February 24 and will focus on increasing financial awareness among women across the country. The central bank has urged banks nationwide to actively participate in this initiative, promoting women’s financial inclusion as a key component of broader economic growth and stability. The campaign underscores the RBI’s recognition of the importance of empowering women through financial education, which can have a far-reaching impact on household savings, investment decisions, and overall economic resilience.
With the latest monetary policy announcement, the RBI has laid the groundwork for a more growth-oriented approach, while remaining vigilant against inflationary risks. The repo rate cut is expected to reduce borrowing costs, stimulate demand in critical sectors such as housing and business investment, and support broader economic momentum. At the same time, the central bank’s commitment to financial literacy and women’s empowerment signals a forward-looking approach that aims to enhance financial inclusion and economic participation. As the economy navigates evolving global and domestic challenges, the RBI’s policy decisions will continue to play a crucial role in shaping India’s growth trajectory in the coming years.
