India Central Bank Cuts Policy Rate for the First Time in Nearly Five Years

The Reserve Bank of India (RBI) has made a significant move by reducing its key interest rate for the first time since May 2020. This decision comes as inflation in India has shown signs of cooling, allowing the central bank to boost the economy, which has been slowing down recently.

Details of the Rate Cut

During a livestreamed address on a Friday, RBI Governor Sanjay Malhotra announced that the Monetary Policy Committee (MPC) decided to cut the repo rate by 25 basis points, bringing it down from 6.50% to 6.25%. This has been the first cut in almost five years, with the last one occurring when the economy was reeling from the impacts of the pandemic.

GDP and Inflation Projections

The RBI has projected real GDP growth at 6.7% for the upcoming fiscal year 2026, alongside an expected inflation rate of 4.2%. Over recent years, the benchmark repo rate had been steady at 6.5%, as inflation remained consistently above the central bank's target rate of 4%.

Inflation rates peaked in October but have since declined. In December, the consumer price index reported inflation at 5.22%, while November's rate was 5.48%, both falling within the RBI's acceptable range of 6%.

Economic Context

India's government recently revised its GDP forecast downwards after economic growth fell short of expectations. In the September quarter, the economy grew by just 5.4%, marking its slowest rate of expansion in nearly two years. Consequently, the growth estimate for the current fiscal year was adjusted from 7.2% to 6.4%, reflecting a challenging economic environment.

Currency Concerns

With the Indian rupee reaching record lows against the US dollar, there are concerns that a reduction in the policy rate might spur further inflation and exacerbate pressure on the currency. The RBI has been actively intervening in the foreign exchange market to manage potential capital outflows and mitigate any sharp declines in the rupee's value.

Conclusion

As India navigates through these economic challenges, the RBI's decision to cut interest rates is aimed at stimulating growth while managing inflation. The next steps will be closely watched by economists and investors alike.

India, RBI, economy