India Cuts Interest Rates For First Time Since 2020

(RTTNews) - The Reserve Bank of India reduced its key interest rates for the first time in nearly five years as the newly appointed governor prioritized providing impetus to economic growth than containing inflation and, underlined that the bank does not target any exchange rate level for the rupee.

The 6-member RBI Monetary Policy Committee, headed by Governor Sanjay Malhotra, decided to lower the policy repo rate by 25 basis points to 6.25 percent from 6.50 percent.

This was the first reduction since May 2020. Markets had widely expected the rate cut after the bank signaled a shift in stance last year and took several measures to boost liquidity in the financial system including a reduction to the cash reserve ratio in December and open market operations in January.

The growth-inflation dynamics opened up policy space for the MPC to support growth, while remaining focused on aligning inflation with the target, Malhotra said. The MPC unanimously voted to continue with a neutral stance.

The RBI governor said a less restrictive monetary policy is more appropriate at the current juncture.

The committee observed that continued uncertainty in the global financial markets together with volatility in energy prices and adverse weather events pose upside risks to the inflation trajectory.

The bank maintained its inflation forecast for 2024-25 at 4.8 percent. For 2025-26, inflation was projected at 4.2 percent.

The bank projected real economic growth at 6.7 percent in the FY 2025-26, which was slightly up from the estimated growth of 6.6 percent in 2024-25.

With the economy likely to remain in a soft patch for a few more quarters, further monetary policy easing is on the cards, Capital Economics' economist Shilan Shah said. The economist forecast another 75 basis points of cuts in this cycle. Malhotra said, "Our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band."

The governor urged banks that passively park funds with the Reserve Banks to actively trade among themselves in the uncollateralized call money market to make it deeper and vibrant.

Malhotra also announced additional measures to address cyber threats and digital risks. The apex bank will launch an exclusive 'bank.in' domain for Indian banks and 'fin.in' domain for the financial sector.