The Reserve Bank of India (RBI) announced a significant policy shift as it decided to cut the benchmark repo rate for the first time in nearly three years. Governor Sanjay Malhotra revealed the rate cut during a livestreamed address, marking a pivotal moment in India's monetary policy landscape. The decision comes as consumer price inflation eases, with the December rate at 5.22%, comfortably within the central bank's tolerance ceiling of 6%.
The Monetary Policy Committee decided to reduce the repo rate by 25 basis points, bringing it down to 6.25%. This move ends a two-year period in which the rate remained unchanged at 6.5%. With inflation dropping, the RBI has also acted by implementing substantial interventions in the foreign exchange market to maintain economic stability.
In recent months, India's inflation rates have shown a declining trend, with November's rate recorded at 5.48%. Despite these positive developments, the domestic inflation rate continued to linger above the central bank's medium-term target of 4%. As a result, the RBI has adjusted its inflation projection upward, expecting it to reach 4.8% this year compared to an earlier estimate of 4.5%.
The central bank has also revised its growth estimates for the current fiscal year, trimming it from the previous forecast of 7.2% in October to 6.4%. This adjustment reflects the slower-than-expected economic growth witnessed in the quarter ended September, where real GDP growth registered at 5.4%, marking its slowest expansion in nearly two years.
Looking ahead, the RBI has set ambitious targets for the fiscal year of 2026. The central bank forecasts a real GDP growth rate of 6.7%, while expecting inflation to moderate to 4.2%. These projections underscore the RBI's confidence in India's economic resilience and its ability to navigate through current challenges.
The rate cut decision was widely anticipated by market analysts, who predicted that the RBI would take action amidst improving inflation dynamics and slower economic growth. The move is expected to provide a much-needed boost to the economy, fostering improved liquidity and encouraging investment.