India’s central bank, the Reserve Bank of India (RBI), has taken decisive action to stimulate the economy, announcing a sharper-than-anticipated interest rate reduction. In its third consecutive move to ease borrowing costs, the RBI lowered the key repo rate by half a percentage point (50 basis points).
This latest cut brings the benchmark rate – the level at which the central bank lends money to commercial banks and which influences borrowing costs for everything from home loans to business credit – down to 5.5%. This is its lowest level in three years. Alongside the rate reduction, the RBI also increased the supply of money, or liquidity, available within the financial system.
Why the RBI Cut Rates
The central bank cited slowing economic growth and falling inflation as the primary drivers behind this aggressive policy easing. According to RBI Governor Sanjay Malhotra, current growth levels were deemed “lower than our aspirations,” making it “imperative to stimulate domestic consumption and investment,” particularly in the face of rising global uncertainties.
This decision follows two previous rate cuts earlier in the year, in February and April.
Recent economic data supports the rationale for lower rates. India’s economy grew by 6.5% in the financial year ending March. While still the world’s fastest-expanding major economy, this figure represents a notable slowdown from the robust 9.2% growth recorded in the preceding financial year (2023-24).
Simultaneously, retail price inflation has decelerated more rapidly than anticipated. In April, inflation slowed to 3.16%, reaching a six-year low and falling below the RBI’s mandated target of 4%. This significant decline was largely attributed to a drop in food prices.
Consequently, the RBI has revised its inflation forecast for the year ahead downwards. However, the central bank also signaled a shift in outlook by changing its monetary policy stance from “accommodative” to “neutral.” This indicates that while current conditions favor lower rates, future adjustments will be more contingent on the evolving interplay between economic growth and inflation dynamics.
Several factors are expected to help keep inflation in check in the coming months, potentially allowing the RBI to maintain lower rates. These include a promising agricultural outlook due to a better-than-expected monsoon, weaker global commodity prices (particularly for oil, which India imports heavily), and the relative strength of the domestic currency.
Economic Impacts of the Rate Cut
The reduction in borrowing costs is anticipated to have multiple positive ripple effects across the economy. Experts suggest these lower rates could:
Boost household purchasing power
Reduce operational costs for businesses
- Ease debt servicing burdens for the government
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A particularly significant beneficiary is expected to be the real estate sector and prospective homebuyers. Lower repo rates directly translate to reduced borrowing costs for home loans, making Equated Monthly Installments (EMIs) more affordable. Anuj Puri, chairman of ANAROCK Group, highlighted that this improved affordability can substantially boost demand, particularly in the affordable and mid-income housing segments, which faced considerable challenges following the pandemic.
Following the announcement, Indian financial markets reacted positively, with indices rallying sharply.
