The Reserve Bank of India (RBI) off its rate cut cycle on February 7 to address the growth slowdown gripping the Indian economy and provide a much-needed boost to urban and rural demand and consumption.
The central bank's Monetary Policy Committee (MPC), headed by new RBI Governor Sanjay Malhotra, voted unanimously to slash the repo rate by 25 basis points (bps) to 6.25 percent from 6.50 percent and maintained the policy stance ‘neutral’. This was the first interest reduction since May 2020 and the first benchmark rate revision after two-and-a-half years.
Malhotra, in his maiden monetary policy review, put forth an optimistic outlook for India’s economic growth, saying the country should “aspire” to a long-term expansion of seven percent while forecasting a near growth of 6.7 percent in the coming fiscal year 2025-26 (FY26).
"Holding back outright dovish signals, the policy commentary signalled a preference to stay flexible. By retaining the neutral stance, the MPC retained flexibility for their future course of action, subject to domestic and external developments, which, in our view, leans towards further rate cuts," said Radhika Rao, executive director and senior economist at DBS Bank.
RBI last reduced the repo rate by 40 basis points to four percent in May 2020, during the onset of the Covid pandemic, to support the economy. The RBI projected real gross domestic product (GDP) growth for 2025 at 6.4 percent, down from 6.6 percent projected in the December policy meeting.
According to RBI, the real GDP growth for 2025-26 is projected at 6.7 percent, with Q1 at 6.7 percent (against 6.9 per cent projected earlier), Q2 at seven percent (from 7.3 percent projected earlier), and Q3 and Q4 at 6.5 percent each.
The central bank projects retail inflation for 2024-25 at 4.8 percent, with Q4 at 4.4 percent. Assuming a normal monsoon next year, the RBI expects the retail inflation for 2025-26 at 4.2 percent with Q1 at 4.5 percent, Q2 at four per cent, Q3 at 3.8 percent, and Q4 at 4.2 percent.
The RBI announced no new liquidity measures, such as a cut to its cash reserve ratio (CRR) or additional bond buyback measures, that might have given stock markets a stronger boost. The RBI Governor said system liquidity – as measured by the average net position under the liquidity adjustment facility (LAF) – turned into a deficit between December 2024 and January 2025.
"The drainage of liquidity is mainly attributed to advance tax payments in December 2024, capital outflows, forex operations and a significant pickup in currency in circulation in January this year," said RBI Governor Malhotra.
1.Boost for retail estate sector: According to experts, the repo rate will likely spur demand for retail loans, which should further boost liquidity, encourage consumption and boost economic growth. Lower interest rates will directly benefit sectors that rely heavily on credit. The real estate market is most likely to grow further as the availability of home loans increases.
"With this, housing demand would increase and help the automobile sector to witness an improvement in the sales of vehicles as it is easier for customers to have easy access to credit, thus facilitating the growth of small and medium enterprises by increasing employment. The liquidity conditions are expected to become more favourable for investment in the sectors with further growth in the offing," said Swapnil Aggarwal of VSRK Capital.
2. Sectoral boost: Assocham described the reversal of the rate cycle as a catalyst for boosting demand across different sectors of the economy. "The 25 basis points cut in repo rate, as recommended by the RBI MPC, would help push demand in several key sectors of the economy, including housing, automobile and consumer durables, among others," said Sanjay Nayar, president of Assocham.
According to Anil Rego of Right Horizons, NBFCs are better positioned to benefit from interest rate cuts as credit growth will improve, followed by banks. Credit-sensitive sectors like auto and real estate will also see a higher demand.
3. Greater capital inflows: Besides sector-specific impacts, the rate cut will likely boost overall investment sentiment, attracting greater capital inflows and enhancing market confidence. With more money circulating in the economy, consumer spending is expected to rise, further bolstering business activity. However, the RBI remains vigilant about inflationary pressures and will closely monitor economic conditions.
"This policy change strategically expands the economy while ensuring financial stability. With the easing of borrowing costs, investment, household spending, and, most importantly, business adaptation to changing economic directions are expected to improve. The policy reflects a commitment to achieving growth while maintaining macroeconomic stability," added Aggarwal.
4. Higher disposable income: Experts said the RBI complements Budget 2025 announcements of increasing the tax exemption limits by cutting interest rates. "This will incentivize the middle class by increasing disposable income. The coordinated effort will go a long way towards stimulating growth and increasing consumer spending,” said Minu Mehta, Dean, School of Commerce, NMIMS Mumbai.
According to Palka Arora Chopra of Master Capital Services Ltd, the proposed measures are expected to enhance the money supply within the economy, improve liquidity, promote borrowing, and stimulate consumer demand. The anticipated action will likely lower borrowing expenses, which may enhance credit accessibility and stimulate demand across various sectors.
5. Relief for banks: In what can come as a huge relief to banks, the RBI Governor announced that the implementation of the liquidity coverage ratio (LCR) will be deferred by at least a year and assured that it will be introduced in a phased manner. He noted that while financial stability is important, the central bank under his leadership will examine the "cost of regulations" to use resources efficiently.
(By arrangement with livemint.com)
