India’s central bank lowered its key repo rate by 25 basis points to 6.25% on Friday, February 7, marking its first rate cut in nearly five years. The Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, announced the decision in a livestreamed address, signaling a shift in policy focus from inflation containment to economic support.
“With the economy likely to remain in a soft patch for a few more quarters yet, further easing is on the cards,” noted Shilan Shah, deputy chief emerging markets economist at Capital Economics, who anticipates 75 basis points of rate cuts in this cycle.
The Reserve Bank of India (RBI) projects FY2025-26 GDP growth at 6.7% while inflation is forecast at 4.2%. The quarterly inflation breakdown is expected to be 4.5% in Q1, 4.0% in Q2, and 3.8% in Q3. Meanwhile, real GDP growth for the current fiscal year is estimated at 6.4%, following 8.2% expansion last year.
Despite expectations of a modest recovery from Q2’s economic slowdown, Malhotra highlighted that growth remains well below last year’s pace. “These growth-inflation dynamics provide policy space for the MPC to support growth while remaining focused on aligning inflation with the target,” he stated.
For two years, the benchmark repo rate had remained at 6.5%, as inflation stayed above the RBI’s 4% target. However, India’s annual consumer price inflation eased to 5.22% in December 2024, in line with market expectations of 5.3% and within the RBI’s 2 percentage-point tolerance band.
Following the rate cut announcement, the Indian rupee strengthened modestly, settling at 87.47 per U.S. dollar. Meanwhile, the RBI reportedly intervened in the foreign exchange market to stabilize capital outflows and prevent excessive currency depreciation.
Malhotra said, “Our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band.”
