Great news for borrowers is on the horizon. Home, auto, and other loans are set to become more affordable. This shift follows a key decision by the Reserve Bank of India.
The RBI has cut its key benchmark interest rate for the first time in six months. This move aims to support the economy amidst challenging global trade conditions.
The six-member monetary policy committee voted unanimously for this change. They lowered the repo rate by 25 basis points to 5.25 percent.
The committee also retained a neutral policy stance. This stance leaves the door open for potential future rate cuts if needed.
This decision is seen as crucial support for the economy. The economy has faced pressure from high US tariffs on Indian goods.
Those tariffs have already impacted exports and the trade deficit. They have also contributed to the rupee hitting a record low.
The RBI’s action supplements recent government efforts. These include major GST reforms and relaxed financial regulations.
So, how does a repo rate cut make loans cheaper? It reduces the interest banks pay to borrow from the central bank.
With lower funding costs, banks can reduce their own lending rates. This directly affects rates like the MCLR and base rate.
The result is more affordable financing for homes, cars, and businesses. Lower EMIs can encourage more borrowing and spending.
This increased economic activity provides vital support. The RBI also announced a massive liquidity boost for the banking sector.
They vowed to provide a Rs 1 lakh crore liquidity injection. This will be done through open market operations and a forex swap.
The central bank will conduct bond purchases in two tranches this month. They also plan a USD 5 billion buy-sell swap to add durable liquidity.
These measures address seasonal liquidity pressures banks face. They are designed to speed up the transmission of lower rates.
This marks the fourth rate cut since February 2025. The total reduction now stands at 125 basis points.
RBI Governor Sanjay Malhotra cited a rare economic scenario. He called it a “goldilocks” period of benign inflation and strong growth.
Inflation sits at a benign 2.2 percent. Growth for the first half of the fiscal year reached 8.0 percent.
Given this balance, the RBI has revised its forecasts. They lowered the inflation projection for the year to 2 percent.
Simultaneously, they raised the GDP growth forecast to 7.3 percent. The previous estimate was 6.8 percent.
Governor Malhotra noted rapid disinflation since October. This caused inflation to breach the lower end of the RBI’s tolerance band.
He stated the growth-inflation balance provides policy space. This room allows the central bank to support growth momentum.
Despite an unfavourable external environment, the Indian economy shows resilience. The RBI remains committed to proactive support.
They will continue to meet the productive needs of the economy. Ensuring macroeconomic stability remains a parallel goal.
The external challenge is significant. US President Donald Trump’s 50 percent tariff on Indian goods caused exports to plunge.
Economists have weighed in on the RBI’s decisions. Crisil’s chief economist highlighted the growth-supportive nature of the policy.
He noted economic data has surprised on both growth and inflation. This created the necessary elbow room for the rate cut.
Real GDP growth surpassed expectations in the first half. Retail inflation, meanwhile, decelerated sharply.
The drop in headline inflation was driven largely by food inflation. Fuel inflation has also remained subdued.
Core inflation, excluding gold, was 2.6 percent in October. GST cuts aided this, indicating no excess demand pressure.
Globally, excess supply-chain capacity suggests limited goods inflation pressure. The rate cut’s effect on growth will likely be seen next fiscal year.
Monetary policy typically operates with a lag. Another economist pointed out the currency pressure from the rate cut.
However, the announced forex swap shows the RBI is aware of these pressures. They are taking steps to manage the currency front.
This comprehensive approach combines rate cuts with liquidity measures. The goal is to make borrowing cheaper and support the broader economy.