The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points to 6%, signaling an accommodative stance to boost slowing economic growth. This move comes amid global uncertainties, including the recent implementation of U.S. tariffs on Indian goods. RBI Governor Sanjay Malhotra stated that the central bank aims to stimulate the economy through softer interest rates.
“Obviously, the trend is going to be downward,” Malhotra said following the decision. The rate cut was anticipated by analysts due to a softening inflation outlook. The RBI cited a “decisive improvement” in inflation prospects, expressing confidence that inflation will align with its 4% target over the next 12 months.
February’s headline inflation was 3.61%, the lowest since July 2024. However, the rate cut also reflects concerns over slowing growth. India’s GDP expanded by 6.2% in the financial year of 2024, a decline from 9.2% the previous year.
Analysts have pointed out downside risks to India’s GDP growth, with projections that growth could fall below 6% due to global economic shocks. The new U.S. tariffs, imposing a 26% levy on goods from India, have added to these economic challenges.
Repo rate cut aimed at growth
Governor Malhotra expressed concern over growth more than the tariffs’ immediate impact. Recent adverse weather conditions, such as a heatwave affecting agricultural output, have further complicated the economic landscape. HSBC estimated that the tariffs would directly reduce India’s full-year growth by 0.5 percentage points for the financial year ending March 2026.
Lower food prices and other factors could help contain inflation in the coming months, with HSBC predicting an average inflation rate of approximately 3.5% over the next six months. The RBI’s move is expected to put more money in loan borrowers’ pockets by reducing their Equated Monthly Installments (EMIs). Calculations show that a reduction in the interest rate from 8.5% to 8% would lead to significant savings for loan borrowers.
Santosh Agarwal, CEO of Paisabazaar, highlights that the transmission of this repo rate cut would be faster for floating rate loans linked directly to the repo rate. However, loans tied to the Marginal Cost of Funds based Lending Rate (MCLR) or other internal benchmarks may experience a delay in the transmission of rate cuts. The stock markets reacted with subdued movements, and gold loan non-banking financial companies (NBFCs) experienced declines due to tighter norms.
Financial experts predict that the RBI might continue on this path of rate cuts if global and domestic economic conditions warrant further stimulus. As the RBI signals a more accommodative monetary policy, investors should stay informed and consider how these changes could influence various sectors and their investment strategies. The evolving economic landscape requires a balanced approach, weighing immediate market reactions against long-term trends.
