For the first time in nearly five years, India’s central bank has lowered interest rates to counter a slowdown in Asia’s third-largest economy.
The Reserve Bank of India (RBI) reduced its repo rate from 6.5% to 6.25%, aligning with economists’ expectations. The repo rate determines the cost at which the central bank lends to commercial banks.
With GDP growth projected to slow to a four-year low of 6.7%, RBI Governor Sanjay Malhotra emphasized that the bank’s “neutral” policy stance allows room for further rate cuts to support economic expansion.
Investment growth and urban consumption have been weakening, while corporate profits declined in the first half of the financial year. However, Malhotra noted that factors like moderating inflation, rising rural demand, and strong agricultural output could bolster growth.
The rate cut may lead to slightly lower borrowing costs for households and businesses, impacting mortgages, credit cards, and corporate loans.
This move follows the RBI’s prior efforts to ease liquidity constraints, including an $18 billion injection into the banking system and a December reduction in the cash reserve ratio for commercial banks. It also comes after the Union Budget’s $12 billion tax cut aimed at the middle class.
Despite these measures, Prime Minister Narendra Modi’s government remains focused on curbing spending to reduce the budget deficit. With limited room for fiscal stimulus, analysts predict further rate cuts of 0.5% to 1% to sustain growth.
However, external challenges complicate the RBI’s task. Global uncertainties, including U.S. tariff policies, foreign investor outflows, and a weakening rupee—already trading near record lows—pose additional risks, especially if further rate cuts accelerate capital flight.
