Key Highlights:
- Repo Rate Cut: RBI reduced the repo rate by 25 bps to 6.25%, the first cut since 2019.
- Growth Projection: India’s GDP growth forecast for FY26 has been raised to 6.7%.
- Inflation Outlook: The central bank expects inflation to remain at 4.2% in FY26.
- Government's Role: The decision follows recent personal tax rate cuts in the federal budget.
In a widely anticipated move, the Reserve Bank of India (RBI) has announced a 25 basis point (bps) reduction in the repo rate, bringing it down to 6.25%. This marks the first rate cut by the central bank in nearly five years, aimed at stimulating economic growth.
The decision was made during the RBI’s latest Monetary Policy Committee (MPC) meeting, which was led by Governor Sanjay Malhotra. Alongside the rate cut, the central bank has revised its economic growth projection for FY26, increasing it from 6.6% to 6.7%. Additionally, the RBI has projected inflation to be at 4.2% for the same period.
Why the Repo Rate Cut Matters?
The reduction in the repo rate follows the government’s move to slash personal tax rates in the Union Budget. The tax cuts aim to boost consumer spending, and the RBI’s rate cut is expected to further support economic expansion by making borrowing cheaper for businesses and individuals.
A recent Reuters poll indicated that over 70% of analysts had anticipated this 25-bps reduction. Lower interest rates can encourage businesses to take loans for expansion, and individuals may find home and auto loans more affordable. This can lead to increased spending, which, in turn, fuels economic growth.
What is Repo Rate and How Does it Impact You?
The repo rate is the interest rate at which the RBI lends money to commercial banks in times of short-term liquidity needs. When the RBI lowers the repo rate, borrowing becomes cheaper for banks, which typically pass on the benefits to consumers by reducing loan interest rates. This makes home loans, car loans, and personal loans more affordable, encouraging spending and investment. Conversely, a higher repo rate makes borrowing expensive, leading to lower inflation but slower economic growth.
With this latest rate cut, borrowers can expect lower EMIs and improved access to credit, boosting overall economic activity. However, lower rates may reduce returns on fixed deposits and savings accounts, impacting those who rely on interest income.
The RBI’s move signals a shift towards supporting economic expansion while maintaining inflation at manageable levels. With global economic uncertainties, the central bank’s decision will play a crucial role in shaping India’s financial landscape in the coming months.
