Boost for Growth or Gamble with Inflation?

6.25% marks a critical moment in the nation’s economic policy.

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As the first rate cut in nearly five years, this move signals a significant shift in monetary strategy, particularly as India grapples with moderating inflation and the need for sustained economic growth. With this decision, the central bank aims to boost lending, stimulate consumer demand, and foster investment, while ensuring that inflation remains within manageable levels. However, as with any major monetary policy intervention, there are multiple dimensions to consider—ranging from its impact on businesses and consumers to the broader economic landscape. India’s central bank has a dual mandate: to control inflation and to ensure economic growth. In recent months, inflation, particularly core inflation, has shown signs of easing, providing the RBI with some headroom to implement an interest rate cut. The Consumer Price Index (CPI) inflation, which remained stubbornly high through much of 2023 and 2024 due to supply chain disruptions, rising food prices, and global economic volatility, has now fallen within the RBI’s comfort zone of 4%-6%. Another critical factor influencing the rate cut is the slowdown in economic growth. While India’s GDP grew at an impressive 7.6% in FY2023-24, the momentum has begun to wane slightly due to global headwinds, a tepid export sector, and uncertainty in private sector investments. By lowering borrowing costs, the RBI seeks to encourage businesses to expand, spur consumer spending, and inject fresh dynamism into the economy. Furthermore, liquidity conditions in the banking system have been relatively tight, impacting credit availability. A lower interest rate environment could ease these constraints, allowing banks to extend credit more freely and support economic activity across multiple sectors.