Reserve Bank of India Cuts Interest Rates for First Time in Five Years

India’s central bank has cut its benchmark interest rate for the first time since May 2020 in an effort to support slowing economic growth. The Reserve Bank of India (RBI) lowered the repo rate from 6.5% to 6.25% on Friday, a widely expected move as inflation cools. This shift comes as the country’s GDP growth slows to its weakest pace in four years, and policymakers look for ways to stimulate the economy.

RBI Governor Sanjay Malhotra explained that the central bank is maintaining a “neutral” policy stance, giving it flexibility for future rate cuts. “We are committed to conduct monetary policy and take such measures, as appropriate, which are timely, carefully calibrated and clearly communicated, to facilitate conducive macroeconomic conditions that reinforce price stability, sustained economic growth and financial stability,” Malhotra said in a live streamed address. The six-member Monetary Policy Committee voted unanimously to keep the stance unchanged, surprising some analysts who had expected a shift to “accommodative.”

The decision follows a series of measures to inject liquidity into the economy, including an $18 billion cash infusion into the banking system and a reduction in commercial banks’ reserve requirements. The RBI’s move aligns with the government’s recent tax cuts, which raised the income tax threshold to provide relief to the middle class. However, Prime Minister Narendra Modi’s administration has limited room for further fiscal stimulus due to concerns over the budget deficit.

Despite India being the world’s fastest-growing major economy, GDP expansion has slowed sharply. Growth fell to 5.4% in the July-September quarter, down from 6.7% in the previous three months. The RBI has downgraded its growth forecast for the next fiscal year to 6.4%, its lowest since 2020. Inflation, which had been a concern for two years, has now eased, dropping to 5.22% in December.

The repo rate cut is expected to make borrowing cheaper for businesses and consumers, potentially boosting investment and spending. Mortgage and credit card interest rates could see a slight decline, offering relief to households. However, corporate profits have shrunk in recent months, and investment growth remains sluggish, raising concerns about how quickly the economy will rebound.

India’s stock market reacted negatively to the announcement, with the benchmark Nifty 50 index falling by 0.5%. Meanwhile, bond yields rose slightly, reflecting uncertainty among investors. The Indian rupee, which had been under pressure due to foreign capital outflows, strengthened slightly to 87.47 against the US dollar after the RBI’s announcement.

Economists expect further rate cuts in the coming months, with predictions ranging from 0.5% to 1% in total reductions. However, global uncertainties, including foreign investor outflows and a weakening currency, could complicate the RBI’s strategy. Some analysts warn that lowering interest rates too aggressively could put additional pressure on the rupee and trigger inflationary risks.

Malhotra acknowledged these challenges but emphasized that the RBI remains focused on balancing growth and inflation. “The current dynamics open up policy space to support growth while keeping inflation aligned with our target,” he said. The central bank’s next move will likely depend on how economic conditions evolve in the coming quarters.

While the rate cut is seen as a step toward economic recovery, experts caution that structural issues, such as weak investment growth and global market volatility, still pose risks. For now, the RBI’s decision signals a shift in priorities from inflation control to economic stimulus as India navigates a period of slower growth.