The Reserve Bank of India slashed its key interest rate for the first time in almost five years, as easing inflation allowed headroom for economic stimulation.
The Monetary Policy Committee has shaved 25 basis points from its policy rate to 6.25%, RBI Governor Sanjay Malhotra disclosed in a live streamed address on Friday.
The anticipated rate cut was the first time since May 2020 when the country combatted a downturn from the pandemic.
RBI forecasts the real gross domestic product (GDP) growth at 6.7% for FY2026, with inflation projected at 4.2%. For the fiscal year ending in March, the central bank estimated a 6.4% real GDP growth, the lowest in four years, compared to the previous 6.6% estimation, while inflation rate remained at 4.8%.
For the past two years, the benchmark repo rate remained at 6.5%, as the country’s inflation rate sat above the central bank’s 4% medium term target.
India’s consumer price inflation has subsided since its peak in October, falling within the RBI ceiling of 6%, coming in at 5.48% in November and 5.22% in December.
After the economic growth fell short of Indian government expectations in 3Q24, when the economy only grew by 5.4%, the government has been steadily trimming its full-year real GDP forecasts.
However, with the rupee hitting rock bottom against the dollar, any rate cut could escalate inflation and worsen the pressure on the currency, which may cause capital outflows.
RBI has implemented substantial interventions in the foreign exchange market to help ease potential foreign capital outflows and prevent any steep currency depreciation.
