RBI reduces repo rate for first time in 5 years
What's the story
Reserve Bank of India (RBI) Governor Sanjay Malhotra has announced a cut in interest rates.
The Monetary Policy Committee (MPC) has decided to cut the benchmark repurchase rate (repo rate) by 25 basis points from 6.5% to 6.25%.
Repo rate is the interest rate at which RBI lends money to commercial banks.
To note, this is the first such rate cut since May 2020.
Changes
Adjustments in SDF and MSF
Along with the repo rate cut, the Standard Deposit Facility and the Marginal Standing Facility have also been adjusted by 25bps each.
The MPC has unanimously decided to keep a "neutral" policy stance. This neutral stance, according to Governor Malhotra, will give RBI the flexibility to adapt to changing economic conditions.
Economic forecast
Projected GDP growth for FY26
Malhotra has projected India's Gross Domestic Product (GDP) growth for FY26 at 6.7%.
He expects a "significant softening" in food inflation pressures.
The GDP growth is expected to remain steady at 6.7% in the first quarter, increase to 7% in the second, and then remain steady at 6.5% for both the third and fourth quarters of FY26.
Outlook
Inflation projections and currency depreciation concerns addressed
On the inflation front, the RBI Governor has projected a rate of 4.8% for the current financial year and 4.2% for FY26.
He also addressed concerns over recent currency depreciation, stating that RBI's exchange rate policy has remained consistent with its forex market interventions aimed at reducing volatility rather than targeting a specific rate or band.
Policy timeline
Rate cut follows Budget presentation
Today's rate cut comes a week after Finance Minister Nirmala Sitharaman tabled the Union Budget for FY26.
Earlier, the RBI had hiked the repo rate by 250bps between May 2022 and February 2023.
Since April 2023, it had remained unchanged at 6.5% to tame inflation and meet a medium-term target of 4%.