RBI cuts repo rate by 25 basis points

RBI Governor Sanjay Malhotra on Wednesday announced a 25 basis cut in the policy rate from 6.25 per cent to 6 per cent and change in monetary policy stance from neutral to accommodative to accelerate economic growth.

The RBI Governor said that the decision to cut the repo rate has been taken unanimously by the Monetary Policy Committee (MPC) keeping in mind the macroeconomic and financial conditions and outlook.

Malhotra said that the MPC has decided to change the monetary policy stance from neutral to accommodative, which will pave the way for easing the monetary policy with more liquidity injections to accelerate economic activity.

This will replace the Neutral stance which requires neither stimulation nor curbs on liquidity, he explained.

The RBI Governor further stated that while inflation has come down in the Indian economy, the central bank would remain vigilant due to the global risks posed by the hike in US tariffs.

He said that the RBI will ensure adequate liquidity in the banking system.

After the repo rate cut, the Standing Deposit Facility, the SDF rate, under the liquidity adjustment facility, will stand adjusted to 5.75 per cent, and the Marginal Standing Facility rate, or the MSF rate, and the bank rate will stand adjusted to 6.25 per cent, Malhotra said.

This is the second consecutive 25 basis reduction in the repo rate after it was reduced in February for the first time since May 2020.

A lower policy rate leads to a decline in interest rate on bank loans which makes borrowing easier for consumers as well as businesses resulting in higher consumption and investments in the economy leading to higher growth.

However, the effectiveness of this rate cut will largely hinge on how quickly and efficiently commercial banks pass on the benefits to borrowers.

He also announced that the RBI has reduced the GDP growth projection for the Indian economy to 6.5 per cent from 6.7 per cent earlier.

The easing in monetary policy comes on the back of the finance minister sticking to the fiscal consolidation path with a reduction in the fiscal deficit target to 4.4 per cent of the GDP for 2025-26 from 4.8 per cent earlier, which has reduced the need for market borrowing by the Government.

This leaves more headroom for the RBI to adopt a soft money policy to spur growth.

Leading banks on Wednesday said that the RBI rate cut, coupled with the revision in stance to accommodative, is a swift and timely move and a forward guidance to the market to stay supportive against evolving global uncertainties, along with empowering the consumers.

The 25bps rate cut is likely to spur demand for home, auto, and personal loans, especially in tier 2 and tier 3 markets, where interest sensitivity is higher, said Binod Kumar, MD and CEO, Indian Bank.

Retail loans grew over 18 per cent YoY as per recent trends and a lower rate environment could further accelerate consumption and support economic momentum.

"Indian Bank is fully geared to pass on the benefits swiftly and responsibly to our customers, ensuring inclusive credit growth," he said in a statement.

According to C.S. Setty, Chairman of the State Bank of India (SBI), the revision of stance to accommodation will cushion the secondary impact of tariffs on the domestic economy.

"With inflation under check, growth imperatives will take precedence in FY26," he said in a statement.

The present framework limits co-lending to partnerships between banks and non-banking financial companies (NBFCs) to priority sector lending such as agriculture, micro-enterprises and loans to weaker sections.

According to Kumar, the change in stance to accommodative is sentimentally positive, allowing room for better liquidity and growth.

"Together, they will support both MSME and retail demand. The MSME sector, which contributes nearly 30 per cent to India's GDP and accounts for over 40 per cent of exports, will benefit from this move as it will ease credit costs and improve cash flows, which are critical for recovery and growth in the evolving market dynamics," he said.

He foresees improved credit appetite at Indian Bank as MSMEs form a vital part of its lending portfolio.

Sakshi Gupta, Principal Economist, HDFC Bank, said: "We expect two more rate cuts in 2025, with the next rate cut likely to be delivered in the June policy."

"As liquidity conditions continue to improve, expected to average above neutral in the current quarter, transmission of rate cuts to money market rates and for deposit rates is also likely to increase," Gupta added.

According to Reuters, India became the second central bank after the Reserve Bank of New Zealand to cut interest rates since the wide-ranging trade levies were announced.

The tariffs have raised the risk of a global slowdown and a US recession while sparking financial turmoil, leaving emerging market central banks facing a tough choice between cutting rates to support growth and shoring up their fragile currencies.

India's Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repo rate by 25 basis points to 6.00% as expected.

The central bank also changed its stance to "accommodative" from "neutral".

The 26% tariffs announced by the US on imports from India have exacerbated uncertainties but quantifying the impact on growth is difficult, central bank Governor Sanjay Malhotra said in his statement.

"With uncertainty around US trade policy set to rumble on and inflation looking contained, further rate cuts are likely," said Shilan Shah, deputy chief emerging markets economist at Capital Economics.

"We think the repo rate will drop to 5.50% this year," Shah said in a note.

Indo-Asian News Service