RBI cuts key policy rate for first time in 5 years

Corporate and retail loans (including home loans) will get cheaper as the Reserve Bank of India's Monetary Policy Committee (MPC) pivoted its policy by cutting the policy rate for the first time in five years, with analysts expecting another cut in April when the committee meets next.

- Roshan Kishore

The quantum of the rate cut -25 basis points or 0.25 percentage points to 6.25% - was in line with expectations although it disappointed the more optimistic analysts who were hoping for a 50-point cut, and the stock markets which had already factored in a 25 basis point cut.

The rationale for the rate cut is laid out in RBI's projections for the year. It expects the GDP to expand by 6.7% in 2025-26, with quarterly growth estimates of 6.7%, 7%, 6.5% and 6.5%. In December, it estimated growth to be 6.9% in the first quarter of the year and 7.3% in the second -- and so the latest numbers suggest that there is a challenge to growth. In its December policy, MPC also overestimated the 2024-25 annual growth by 20 basis points at 6.6%. According to the first advance estimates released in January, GDP growth in 2024-25 is expected to be 6.4%.

It also expects inflation for the year to be 4.2%, close to RBI's target of 4% (in fact, the closest it will be since India adopted an inflation targeting framework for tis monetary policy in 2016). If the annual inflation projection of RBI were to materialise, it will be the lowest annual inflation number since 2018-19 when it came in at 3.4%