The Reserve Bank of India (RBI) has delivered a surprise to markets by cutting the repo rate by 25 basis points, lowering it to 6.25%. This marks the first reduction in the key lending rate in five years, a move aimed at bolstering economic growth amidst concerns of a slowdown.
Rationale Behind the Cut:
The decision, announced by the Monetary Policy Committee (MPC) headed by Governor Shaktikanta Das, signals a shift in the central bank’s focus. While inflation has remained within the RBI’s target range, the MPC has expressed growing apprehension about the pace of economic expansion.
Impact on the Economy:
The rate cut is expected to lower borrowing costs for banks, which could translate into reduced interest rates for consumers and businesses. This, in turn, is anticipated to stimulate investment and consumption, providing a much-needed fillip to economic activity. Lower interest rates can make loans for big-ticket purchases like homes and automobiles more attractive, potentially boosting demand in these sectors. Furthermore, a lower repo rate can make Indian exports more competitive on the global stage by reducing borrowing costs for businesses engaged in international trade.
The RBI’s move comes against the backdrop of a global economic slowdown and a desire to strengthen domestic demand. The MPC acknowledged the challenging international environment and the need to support growth momentum within the Indian economy.
While the rate cut is widely seen as a positive step, the stock market reacted negatively to the announcement, with both the Sensex and Nifty indices declining. This market reaction could be attributed to a variety of factors, including concerns about the underlying economic outlook, profit-taking by investors, or a combination of both. Despite the market’s response, experts generally believe that the rate cut is a step in the right direction to support growth. However, they also suggest that the RBI may need to consider further measures if the economic slowdown persists.
The RBI has maintained its “neutral” stance on monetary policy, leaving the door open for future rate cuts or hikes depending on how the economic situation unfolds.
The central bank has also projected GDP growth of 6.7% for the financial year 2026. This rate cut is a significant development and its impact on the economy will be closely watched in the coming months.
