In a significant move, the Reserve Bank of India (RBI) announced a 25 basis points (bps) cut in the repo rate, bringing it down from 6.5% to 6.25%. This is the first repo rate reduction in nearly five years and comes amid efforts to support economic growth while maintaining financial stability.
The decision was taken during the Monetary Policy Committee (MPC) meeting chaired by RBI Governor Shaktikanta Das on February 7, 2025. The move is expected to boost credit growth, lower borrowing costs, and provide relief to businesses and home loan borrowers.
Why Did RBI Cut the Repo Rate?
Several factors contributed to the RBI’s decision to reduce the repo rate, including:
Slowing Inflation:
India’s Consumer Price Index (CPI) inflation has remained within the RBI’s target range of 2-6%, allowing room for a rate cut.
Global Economic Slowdown:
Uncertainties in the global financial markets, including slow growth in major economies like the US and China, have influenced RBI’s accommodative stance.
Need to Boost Economic Growth:
With India’s GDP growth slightly moderating, the central bank aims to stimulate credit demand in the economy.
Liquidity Support:
The move is intended to enhance liquidity in the banking system, making funds cheaper for businesses and individuals.
Impact of Repo Rate Cut
On Borrowers
Lower EMIs: Home loans, car loans, and personal loan EMIs are expected to come down.
Easier Credit Access: Small businesses and startups can avail cheaper loans for expansion.
On Economy
Boost to Growth: Lower interest rates can drive higher investments and consumption.
Stronger Market Sentiment: Stock markets may respond positively to the move.
On Banking Sector
Pressure on Deposits: Banks may reduce fixed deposit (FD) rates, impacting savings.
Narrower Margins: Banks may see a squeeze in their interest income.
Market & Expert Reactions
Shaktikanta Das (RBI Governor):
“The rate cut is aimed at maintaining financial stability while supporting economic growth. Inflation remains under control, allowing us to take this step.”
Economists’ View:
Experts believe that another rate cut could be expected later in 2025 if inflation remains stable.
The move is seen as a boost for India’s investment climate.
Stock Market Reaction:
The BSE Sensex and Nifty saw an initial surge, reflecting positive investor sentiment.
Conclusion
The RBI’s decision to cut the repo rate to 6.25% marks a historic shift after nearly five years, signaling an accommodative stance to support economic growth. While borrowers stand to benefit, depositors may face lower interest rates. The market now awaits further signals from the central bank regarding future rate movements.
