India’s central bank cuts repo rate by 25 bps to spur growth

The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) on Friday cut the repo rate by 25 basis points to 6.25 per cent.

RBI Governor Sanjay Malhotra said the MPC has also unanimously decided to continue with a neutral stance and will focus on inflation while supporting growth. This would provide flexibility to respond to the macroeconomic environment, he added.

He said that inflation has declined and is expected to further moderate and gradually align with the RBI’s target.

Malhotra said the RBI was committed to providing sufficient liquidity in the economy and would take steps to ensure durable liquidity to meet the requirement of the system.

He also said that the RBI was keeping a close watch on the rupee and was taking all steps to keep the Indian currency stable. Growth in the Indian economy is also expected to pick up growth momentum and rural demand has already revived, he said.

However, there are uncertainties in global trade and climate change also poses a risk to growth, the RBI Governor said.

Malhotra also said that the MPC felt that excessive volatility in global financial markets and global trade policies calls for the MPC to remain watchful.

The RBI’s monetary policy announcement comes close on the heels of the Budget 2025-26. The finance minister has decided to stick to the fiscal consolidation path with a reduction in the fiscal deficit target to 4.4 per cent of 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.

Malhotra, is a former finance ministry official and has already announced the injection of Rs 1.5 lakh crore in the banking system as the liquidity situation had become tight in the financial sector.

The government has reduced its net market borrowings estimate for the 2025-26 financial year to Rs11.54 lakh crore which will leave more money in the banking system for giving out loans to corporates for investment and spur demand through consumer spending to accelerate growth.

According to senior officials, both the fiscal measures announced in the budget and the RBI’s monetary policy will be aligned to accelerate growth along with price stability. The Budget has rolled out significant income tax cuts for the middle class as 1 crore individuals earning up to Rs12.75 lakh a year will not pay any tax and will have more money in their hands to spend on goods and services. This will add to aggregate demand in the economy, giving a fillip to growth.

The Reserve Bank of India (RBI) on Friday raised the country’s real GDP growth forecast to real GDP growth for 2025-26 to 6.7 per cent, as it expects a robust rabi crop output and an expected recovery in industrial activity to support economic growth going ahead.

It also expects CPI inflation to moderate to 4.4 per cent in the fourth quarter of the current financial year and decline further to 4.2 per cent in 2025-26.

RBI Governor Sanjay Malhotra said that “looking ahead, healthy rabi prospects and an expected recovery in industrial activity should support economic growth in 2025-26”.

“Among the key drivers on the demand side, household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26,” Malhotra noted.

“Fixed investment is expected to recover, supported by higher capacity utilisation levels, healthy balance sheets of financial institutions and corporates, and Government’s continued emphasis on capital expenditure,” Malhotra said in his address after the monetary policy committee (MPC) meeting. At the same time, he mentioned the risk to growth posed by global uncertainties and climate change.

“Taking all these factors into consideration, real GDP growth for 2025-26 is projected at 6.7 per cent with Q1 at 6.7 per cent; Q2 at 7.0 per cent; and Q3 and Q4 at 6.5 per cent each. The risks are evenly balanced,” said the RBI Governor.

The RBI had in December revised its GDP growth forecast to 6.6 per cent from 7.2 per cent earlier.

He pointed out that the global economy is growing below the historical average even though high frequency indicators suggest resilience amidst continued expansion in world trade.

The world economic landscape remains challenging with slower pace of disinflation, lingering geopolitical tensions and policy uncertainties, he added.

Malhotra also said that the strong US dollar continues to strain emerging market currencies and enhance volatility in financial markets. In this context he mentioned that the RBI was keeping a close watch on the depreciation of the rupee and taking all steps to stabilised the Indian currency.