With the Monetary Policy Committee (MPC) unanimously maintaining a "neutral" stance, the Reserve Bank of India (RBI) on Friday announced that it cut the key repo rate for the first time in almost five years in a bid to energise a slowing economy.
The MPC decided to a 25 basis-point-cut in the policy rate to 6.25 per cent, announced RBI governor Sanjay Malhotra. While this is the first reduction since May 2020, the last major revision happened two years ago, when the repo rate was hiked by 25 basis points to 6.5 per cent in February 2023.
This is in line with the outlook by the apex bank which sees the slowest growth trajectory for the current fiscal in nearly four years. The RBI also estimated India’s GDP growth in the upcoming fiscal year to be 6.7 per cent.
Following the Union Budget 2025 tabled by finance minister Nirmala Sitharaman on February 1 in the Parliament, the centre called for a rate cut in a bid for the monetary policy to align with the fiscal policy. The ministry assumed a populist view of lifting a slowing economy and increasing middle-class spending to arrest the economic slowdown.
Sensex, Nifty return to gains after RBI announcement
Despite trading in the red ahead of the MPC decision, the markets seemed to welcome the policy rate cut. Sensex and Nifty bounced back moments after the RBI governor’s announcement, both gaining over 10 points in the first half hour after the news.
While the Indian economy remained strong, it was "not immune to global challenges", the RBI governor reminded.
US markets closed higher on Thursday night, with the rupee hitting a new all-time low of 87.59 vs the US dollar—a 36 paise plunge from the previous close. Just before the MPC decision, the rupee had gained back 16 paise to reach 87.43 in early Friday trade.
Foreign investors (FIIs) offloaded Rs 3,549.95 crore worth of equities on Thursday, as risk aversion and a gaining American currency took hold of sentiments on the street.
However, Malhotra stressed that the RBI forex policy remained consistent. It favoured an "orderly and stable market operation" and "does not target any exchange rate", he added.
The latest MPC meeting, the three-day summit that began on Wednesday, saw RBI governor Sanjay Malhotra chairing for the first time.
Opining that inflation targeting served the Indian economy well, Malhotra stressed how average inflation was lower since the introduction of the monetary policy framework.
RBI projects retail inflation at 4.2 per cent for FY2025-2026
The central bank on Friday also announced its inflation projections for the Indian economy.
While retaining the latest outlook of 4.8 per cent for the current fiscal, RBI announced it sees retail inflation for the upcoming FY2025-2026 at 4.2 per cent.
With regard to the consumer price index (CPI), Malhotra said that the risks would be evenly balanced. "Assuming a normal monsoon next year, CPI inflation for FY2025-2026 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent," he added. The CPI inflation in November 2024 was 5.48 per cent, while it hit a four-month low in December to 5.22 per cent, as food and vegetable prices eased.
Another highlight of the RBI announcements post-MPC meeting was that the central bank recognised measures to check cyber fraud.
In light of it, Malhotra announced banks to adopt exclusive domain name "bank.in", and non-banking entities "fin.in". Registrations are expected to start from April, said the RBI governor. The RBI is yet to provide more details on this initiative, but the markets welcomed it as a need of the hour in combating rampant financial cyber fraud.
