The Reserve Bank of India (RBI) has taken a significant step by reducing its repo rate from 6.5% to 6.25%, marking the first interest rate cut in nearly five years. This decision aims to counteract a slowdown in growth in Asia's third-largest economy. With India's GDP growth projected to hit a four-year low of 6.7%, the central bank is making moves to support economic expansion and address various domestic and international challenges.
The rate cut follows the Union Budget's announcement of a $12 billion tax cut designed to assist the middle class, which has been under financial strain. Additionally, the RBI has previously injected $18 billion into the domestic banking system to bolster liquidity. These measures reflect a comprehensive strategy to rejuvenate the Indian economy, which has seen corporate profits decline during the first half of the financial year.
RBI Governor Sanjay Malhotra emphasized that the central bank maintains a "neutral" policy stance, providing flexibility to further support growth if needed. By reducing the cash reserve ratio by half a percent in December, the RBI has already set the stage for increased lending capacity among commercial banks.
The rate cut is expected to stimulate rural demand and improve agricultural output, both crucial components of India's economy. Economists forecast additional rate cuts in the range of 0.5% to 1% as part of ongoing efforts to ease cash shortages and reduce the budget deficit. The decision also aligns with global economic uncertainties, such as those stemming from U.S. President Donald Trump's tariff policies and the subsequent withdrawal of foreign investments.
Despite concerns that a depreciating currency might weaken further with lower rates, the RBI's move is largely seen as a positive step. Economists believe that this will bolster economic growth and provide a much-needed boost to various sectors.