The central bank had left the benchmark rate at which it lends money to commercial banks unchanged at 6.50 per cent for 11 consecutive times as it looked to reign in high inflation. With growth slowing and inflation expected to decline further, economists now see today's cut by RBI to 6.25 per cent a start of a rate easing cycle that could see interest rates going down a further 50 to 75 basis points.
This was the first monetary policy committee (MPC) meeting under the new RBI Governor Sanjay Malhotra. There were two key things that led to the rate cut.
Firstly, as Malhotra noted, inflation had declined and was expected to further moderate in 2025-26 financial year, gradually aligning with RBI's targeted 4 per cent. For instance, as per RBI's projections, CPI (consumer price index) inflation is expected to average 4.5 per cent in the April-June quarter, falling to 4 per cent in the September quarter and declining further to 3.8 per cent in the December quarter.
On the other hand, India's GDP growth has slowed. Compare with the 8.2 per cent growth in the year ended March 2024, in the current financial year, the economy is only expected to grow 6.4 per cent and RBI's projection for next year (2025-26) is only slightly higher at 6.7 per cent. While a high food inflation was a major reason behind slowing urban demand, analysts have in parts also blamed high interest rates for the slowdown.
The trade and tariff related uncertainty in the global market post the return of Donald Trump as US President is only adding to growth pressure, especially on the exports front.
In this backdrop, a rate cut should ease the burden some what on middle class borrowers, who were already given a big relief in income tax by the Finance Minister Nirmala Sitharaman in the Union Budget.
"This growth-supportive monetary policy needs to be seen in conjunction with extensive measures to infuse liquidity of Rs 1.5 lakh crore to change the liquidity deficit banking ecosystem on top of Rs 1.16 lakh crore of liquidity infusion in December 2024 because of 50 bps reduction in cash reserve ratio (CRR). This rate cut will be passed to the borrowers, particularly in the interest rate segments like home loans, consumer loans, education loans, vehicle loans, etc," said Manoranjan Sharma, chief economist at Infomerics Ratings.
The RBI MPC maintained its policy stance at "neutral", which indicates possibility of further rate cuts, said Sharma, who expects two rate cuts cumulatively aggregating to 50 basis points in the next financial year.
Dharmakirti Joshi, chief economist at CRISIL sees the RBI slashing the repo rate by 75-100 bps in 2025-26.
"Elevated rates have impacted India’s GDP growth this fiscal. The Budget for next fiscal is mildly supportive for growth while continuing on the fiscal consolidation path," said Joshi.
The MPC moves will depend more on domestic inflation, he added and on that front the expectation is healthy kharif and rabi crop will ease food inflation and likely drive CPI inflation down to 4.4 per cent next year.
Indranil Pan, chief economist at Yes Bank expects a shallow rate cut cycle.
"As the governor indicated, the MPC will have to stay watchful of these risks and remain flexible to change course if need be. We think that the RBI will carry through with further rate cuts in April and thereafter. With inflation forecast for FY26 at 4.2 per cent, a 150-bps real rate means that the repo rate can go down to 5.75%," said Pan.
His base case is repo rate at 5.75 per cent, which is another 50 bps cut from here on. At best the terminal rate could be at 5.50 per cent, that is 75 bps lower from current level.
"The RBI will remain watchful of the global uncertainties and their impact on the Indian economy. A global trade war could adversely affect India’s growth, inflation, and trade dynamics. However, there is still a lack of clarity on the extent of this impact. Sharp FII outflows and rupee weakening have further complicated the task for the RBI. However, moderating food inflation and benign core inflation will provide some comfort," said Rajani Sinha, chief economist, CareEdge Ratings. She is expecting a further rate cut of 25-50 bps.
Sakshi Gupta, principal economist at HDFC Bank expects another 25 bps rate cut in the April MPC meeting. But, the space for further rate cuts beyond that would hinge on how domestic and global headwinds pan out, she said.
