The Reserve Bank of India (RBI) cut its key repo rate by 25 basis points to 6.25%, marking its first reduction in nearly five years, according Reuters.
The decision, announced on Friday, signals a shift towards a less restrictive monetary policy as the central bank seeks to stimulate India’s sluggish economy. The Monetary Policy Committee (MPC), comprising three RBI members and three external experts, unanimously voted for the rate cut and maintained a “neutral” policy stance.
India’s economy faced headwinds, with the government forecasting annual growth of 6.4% for the current fiscal year—below initial projections and the slowest pace in four years. Growth is expected to remain in the 6.3%-6.8% range next year, with the RBI projecting 6.7% expansion.
RBI Governor Sanjay Malhotra highlighted improving employment conditions, recent tax cuts, and strong agricultural output as positive factors. Inflation, which eased to a four-month low of 5.22% in December, is expected to gradually decline towards the RBI’s 4% target, averaging 4.8% this year and 4.2% next year.
The MPC while continuing with the neutral stance felt that a less restrictive monetary policy is appropriate at this current juncture.
Balancing stability and efficiency
Malhotra, who took office in December, emphasised the need to balance stability and efficiency in banking regulations. He signalled a potential shift from the tight regulatory approach of his predecessor, Shaktikanta Das. Malhotra also noted that the RBI would consider the trade-offs of new rules, such as higher capital requirements for infrastructure lending and digital deposits.
There are trade-offs between stability and efficiency. We will keep this trade-off in mind while formulating regulations. It will be our attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation.
The Indian government has previously criticised stringent banking regulations for contributing to the economic slowdown. Since Malhotra’s appointment, the rupee has weakened, and market volatility has increased, prompting speculation of a softer stance on currency management.
Malhotra reiterated that the RBI’s interventions aim to smooth “excessive and disruptive volatility” rather than target specific exchange rates. The rupee fell marginally after the policy announcement, trading close to its record low.
The rate cut reflects the RBI’s efforts to support growth while managing inflation risks, marking a cautious yet significant step towards easing monetary policy.
