RBI cuts key lending rate after 5 years

India's Monetary Policy Committee, led by newly appointed RBI Governor Sanjay Malhotra, cut the benchmark repo rate by 25 basis points, while maintaining its neutral stance. This is the first time in two years that the MPC has changed the benchmark lending rate and the first time in five years that rates have been cut.

After the latest cut, the repo rate (the interest rate at which the RBI gives loan to banks) stands at 6.25 per cent, down from 6.50 per cent earlier.

This is the first interest rate cut by the RBI since Covid times (May 2020). Between May 2020 and April 2022, the RBI kept the repo rate unchanged at 4 per cent. It then started hiking the policy rates since April 2022 and gradually raised to 6.5 per cent till February 2023 before keeping it unchanged for two years until now. With the RBI lowering the key policy rates, it is likely that banks will follow suit.

With a reduction in the repo rate and an expected recovery in industrial activity and robust household consumption, along with positive business sentiments, the RBI has projected the real gross domestic product (GDP) at 6.7% for 2025-26.

Reduction in the repo rate, the rate of interest on home loans will also witness a dip, thereby bringing much-needed relief to the homebuyers. This would give a boost to demand for housing and encourage investment in the real estate sector, benefitting both end-users and investors.

The RBI mentioned that headline inflation eased during November-December 2024, as compared to 6.2% in October. The central bank anticipates core inflation to remain moderate. However, uncertainty in global financial markets and adverse weather conditions coupled with volatility in energy prices may pose a risk. Anticipating a normal monsoon in the coming year, the central bank has projected consumer price index (CPI) inflation for 2025-26 to be at 4.2%.

The central bank will continue with its neutral monetary policy stance owing to the global economy’s slow pace of disinflation, ongoing geopolitical tensions, and policy uncertainties.

The RBI in its endeavour to enhance women’s role in financial decision-making and household budgeting, will launch a campaign titled "Financial Literacy: Women’s Prosperity,” commencing from February 24. It has urged banks across the country to actively participate in this campaign to promote women’s financial inclusion in the broader economic growth and stability.