RBI cuts repo rate by 25 basis points (bps), bringing it down to 6.25%. This is the first rate cut in nearly five years. The previous rate drop occurred in March 2020, when 75 basis points were reduced to 4.40%.
RBI Governor Sanjay Malhotra announced the decision at a three-day Monetary Policy Committee (MPC) meeting from February 5 to February 7, 2025.
He said, “The Monetary Policy Committee has come to a unanimous decision to lower the policy rate by 25 basis points, from 6.5% to 6.25%!”
RBI Cuts Repo Rate: important insights
Here are five important points from the RBI’s policy decision in February:
RBI takes a bold step forward, beginning to cut rates:
Amid heightened global uncertainty, the central bank’s monetary policy committee unanimously agreed to cut benchmark policy rates by 25 bps to 6.25 percent from 6.50 percent.
The action exactly matched market expectations as, following the Budget 2025, there was great hope that the RBI would intervene proactively to stimulate economic development.
Growth remains predominantly constant but Requires Focus:
The Monetary Policy Committee (MPC) seems to focus a lot on economic data. RBI cuts repo rate anticipating that the real GDP will grow by 6.7% in the next fiscal year (FY26), but it has noted some worries because of global issues.
The RBI expects the real GDP growth for this year to be 6.4 percent, which is lower than the 6.6 percent predicted in the last policy meeting in December.
The expected growth of real GDP for 2025-26 is 6.7%. In the first quarter, it is anticipated to be 6.7% (down from the earlier estimate of 6.9%), in the second quarter it is expected to be 7% (down from 7.3%), and in the third and fourth quarters, it is forecasted to be 6.5% for both.
Malhotra stated, “Global headwinds persist in creating uncertainty in the outlook and present downward risks.”
RBI Cuts Repo Rate Anticipating Inflation to Come Down:
The RBI believes that inflation will slowly decrease to around 4 percent, which is their goal.
Inflation is forecast to reach 4.8% in 2024-25, with a 4.4% rate in the fourth quarter. If there is a typical monsoon next year, the RBI anticipates 4.2% CPI inflation in 2025-26. They estimate it to be 4.5% in the first quarter, 4% in the second, 3.8% in the third, and 4.2% in the fourth.
“After rising above the allowed limit in October, overall inflation has decreased in November and December.” Food prices are expected to go down significantly because of a good Kharif harvest, lower food prices in winter, and positive expectations for the rabi crop, as long as there are no major supply issues. The RBI Governor stated that core inflation is anticipated to rise but remains low.
The external economy stays strong:
RBI Governor said India’s external sector is resilient due to strong indicators.
He said that India’s current account deficit (CAD) fell from 1.3% of GDP in Q2 last year to 1.2% this year.
“This year’s CAD should stay within sustainable levels. He claimed India’s foreign exchange reserves were 630.6 billion US dollars on January 31, providing almost 10 months of import cover.
Liquidity conditions:
According to the Reserve Bank of India (RBI) Governor, system liquidity, which is defined by the average net position under the liquidity adjustment facility (LAF), became a deficit in December 2024 and January 2025.
He noted that the major reasons for the drainage of liquidity are advance tax payments in December 2024, capital withdrawals, forex activities, and a considerable increase in the amount of currency in circulation in January of this year.
“The Reserve Bank is dedicated to ensuring that there is enough liquidity in the system. We have taken several measures in this regard.29 Governor Malhotra stated, “We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions.”
RBI Cuts Repo Rate: How rate cut will impact the loans?
Yes, a repo rate drop usually results in lower interest rates because it lowers the cost at which banks borrow from the RBI.
Borrowers may gain from lower loan interest rates when banks and NBFCs pass on this benefit, although the extent depends on how banks alter their lending rates.
Those with existing loans with adjustable interest rates may see their EMIs reduced as well.
Lower interest rates encourage people to take out loans to buy homes, vehicles, and other big-ticket purchases.
The Union Budget announced no income tax for earnings up to ₹12 lakh, providing major relief to the middle class.
Repo Rate Cuts Effect on Mutual Funds:
A repo rate drop by the RBI affects mutual funds differently depending on their category. For example, debt mutual funds, particularly long-term funds, benefit when bond prices rise and interest rates fall. However, short-term debt funds may see reduced returns when short-term yields fall.
On Fixed Deposits:
On the other hand, those who have invested in FDs may be dissatisfied with rate cuts because depositors may see interest rates on fixed deposits and other types of savings fall as a result of rate reductions.
In short, rate reduction will result in lower FD interest rates.
Conclusion:
the RBI’s decision to cut the repo rate by 25 basis points to 6.25% marks a significant shift in monetary policy after nearly five years. This move, aimed at stimulating economic growth amid global uncertainties, reflects the proactive approach to supporting India’s economy.
With a focus on maintaining inflation within the target range, ensuring liquidity, and fostering resilience in the external sector, the RBI has demonstrated its commitment to balancing growth and stability. While challenges such as global headwinds and fluctuating liquidity conditions persist, the RBI’s measures, coupled with optimistic GDP growth projections and controlled inflation expectations, paint a cautiously hopeful picture for India’s economic trajectory in the coming years.
As the MPC continues to monitor evolving conditions, this rate cut could catalyze renewed economic momentum, provided global uncertainties are managed effectively.
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