A GENTLE NUDGE TO BORROW

Additionally, the RBI's decision to maintain the Cash Reserve Ratio (CRR) at 4% means that banks are still required to hold a portion of their deposits as reserves, limiting the funds available for lending.

- Ruchira Talapatra

On February 7, 2025, the Reserve Bank of India (RBI) announced a 25 basis points reduction in the repo rate, bringing it down to 6.25 %. This decision marks the first rate cut in nearly five years, with the previous reduction occurring in May 2020. The Monetary Policy Committee (MPC) unanimously voted for this adjustment while maintaining a 'neutral' monetary policy stance. The RBI also projected a GDP growth rate of 6.7% for the fiscal year 2025-26 (FY26) and anticipates a decline in inflation to 4.2% in FY26 from 4.8% in FY25. Additionally, the central bank introduced measures such as exclusive internet domain names for banks and non-bank financial entities and highlighted the challenging global economic backdrop. Despite external challenges, the RBI emphasized the resilience of the Indian economy, noting that the current account deficit (CAD) is expected to remain within sustainable levels. As of January 31, India's foreign exchange reserves stood at $630.6 billion, providing an import cover of over ten months. The next MPC meeting is scheduled for April 7-9, 2025.

RATIONALE BEHIND THE RATE CUT

The RBI's decision to reduce the repo rate is primarily driven by the need to stimulate economic growth amid easing inflationary pressures. India's GDP growth has been on a downward trajectory, with the government forecasting a growth rate of 6.4% for the fiscal year ending in March 2025, marking the slowest pace in four years. Factors contributing to this slowdown include a weaker manufacturing sector and subdued corporate investments. The central bank's move aims to provide a boost to the economy by making borrowing more affordable, thereby encouraging spending and investment.