RBI cuts repo rate by 25 bps to 6.25% as economy slows
07 Feb 2025
Reserve Bank of India (RBI) on Thursday announced a 0.25 basis point reduction in its policy repo rate, effective immediately, in a bid to pump liquidity into a slowing economy.
A meeting of RBI’s Monetary Policy Committee (MPC) that ended on Thursday decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25 per cent.
Accordingly, RBI will adjust the standing deposit facility (SDF) rate to 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.
This is the first time the central bank is cutting its policy rates since May 2020. RBI has been keeping repo rates high to limit liquidity flow amidst stubborn inflation that refused to slow down with commodity prices, mainly that of food items, continuing to rise.
RBI, however, said despite the current rate cut, it will continue with the neutral monetary policy stance and remain focused on long-term alignment of inflation and growth.
RBI is looking at achieving the medium-term target of keeping consumer price inflation at 4 per cent within a band of +/- 2 per cent.
RBI noted that the global economic scenario remains challenging and economic growth continues to be below the historical average, although world trade has shown continued growth. The slower pace of disinflation, a strong dollar, lingering geopolitical tensions and policy uncertainties pose challenges for the Indian economy, it added.
On the domestic front, RBI noted the slow down in the growth of India’s real gross domestic product (GDP) to 6.4 per cent for the 2024-25 fiscal despite a recovery in private consumption, as projected in the first advance estimate of national income and a recovery in agriculture sector.
Prospects for agriculture remain good, but this needs to be supported by industrial growth for the economic growth to gain momentum in 2025-26.
Household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26. Healthy balance sheets of corporates and financial institutions combined with the government’s continued emphasis on capital expenditure will support fixed investment, RBI pointed out.
However, headwinds from geo-political tensions, protectionist trade policies, volatility in international commodity prices and financial market uncertainties, continue to pose downside risks to the outlook.
RBI has projected India’s real GDP growth for 2025-26 at 6.7 per cent with Q1 at 6.7 per cent, Q2 at 7.0 per cent, and Q3 and Q4 at 6.5 per cent each.
