At a time, when India's economy has measurably slowed and inflation is seen to be cooling, the Reserve Bank of India's monetary policy committee (MPC) has finally acted, cutting the repo rate by 25 basis points (0.25 per cent) to 6.25 per cent from 6.50 per cent. This is expected to bring relief to millions of borrowers, bringing down their monthly instalments to an extent.
If one's home loan is linked to an external benchmark like repo, the transmission should be quick. Interest rates for new borrowers will also be reduced.
A quick calculation shows, that a home loan of Rs 50 lakh at 9 per cent per annum for a 20-year duration will have a monthly EMI of around Rs 45,000.
A 25 basis points rate reduction will bring down the monthly EMI by about Rs 800 to around Rs 44,200. It is worth noting that borrowers also have the option to keep the EMI unchanged and in turn reduce the tenure of the loan, which will help them pay it a little faster.
While the repo rate was cut, the MPC decided to maintain its "neutral" policy stance as it remains focused on durable alignment of inflation to the target, while supporting growth. Both the decisions were unanimous.
The last time the RBI cut the repo rate (the rate at which it lends money to commercial banks) was in May 2020, amid the Covid19 pandemic.
"The MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target. The MPC also noted that though growth is expected to recover from the low of Q2 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth," said RBI Governor Sanjay Malhotra.
This was the first MPC meeting chaired by Malhotra, who had taken charge as RBI Governor in December 2024 after Shaktikanta Das' tenure had ended.
The MPC meeting came in the backdrop of various headwinds like slowing economic growth, global geopolitical tensions, and uncertainty around US President Donald Trump's trade and economic policies. Amid this, there has been continued sell-off by foreign investors from emerging market equities as they move capital to safer dollar assets.
The US Federal Reserve cut interest rates three times consecutively towards the end of 2024. However, after the full 1 percentage point rate cut, the Fed paused in January and chances of sharper rate cuts this year have reduced. This coupled with the FII sell-off has led to the dollar continuously gaining strength, while EM currencies, including the Rupee, have sharply fallen.
"Excessive volatility in global financial markets and continued uncertainties about global trade policies coupled with adverse weather events pose risks to the growth and inflation outlook. This calls for the MPC to remain watchful," said Malhotra.
The Indian rupee has been on a slippery slope for some time now, declining below 87 to the dollar mark this week. Malhotra said RBI's exchange rate policy had been consistent over the years and that the stated objective was to maintain orderliness and stability, without compromising market efficiency.
"Our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band," he said.
India's GDP growth has markedly slowed in recent quarters and is expected to grow 6.4 per cent in the current financial year ending March 2025, compared with 8.2 per cent in 2023-24. Tepid urban consumer demand has been a major worry.
The Union Government responded earlier this month; it announced major income tax relief to the vast middle class in order to boost consumption, while firmly remaining on its fiscal consolidation path in the Union Budget.
Improving employment conditions, tax relief in the Union Budget and moderating inflation, together with healthy agricultural activity "bode well" for household consumption, felt Malhotra.
The continued buoyancy in services exports is expected to support growth, but global headwinds continue to impart uncertainty to the outlook and pose downward risks, according to Malhotra. In this backdrop, RBI expects the real GDP to grow 6.7 per cent in the financial year ending March 2026.
The central bank has also retained its CPI (consumer price index) inflation forecast for the current financial year at 4.8 per cent and has projected retail inflation at 4.2 per cent for the 2025-26 financial year.
"Going ahead, food inflation pressures, absent any supply side shocks, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects. Core inflation is expected to rise but remains moderate," said Malhotra.
The RBI will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions in the market, he added.
