Mumbai, February 07, 2025.
Home, auto and other loans are likely to see a drop in interest rates after the Reserve Bank of India under a new Governor cut the key benchmark rate on Friday for the first time in almost five years to spur a sluggish economy.
The Monetary Policy Committee, headed by RBI Governor Sanjay Malhotra, slashed the repo rate by 25 basis points to 6.25 per cent. This was the first reduction since May 2020 and the first revision after two-and-a-half years.
Malhotra, a career bureaucrat who replaced Shaktikanta Das barely days after the last bi-monthly MPC meeting in December, forecast the Indian economy to grow at 6.7 per cent in the fiscal year starting April 2025 while inflation rate to lower to 4.2 per cent.
For the fiscal year ending March 31, RBI quoted the government estimate to put the growth rate at 6.4 per cent, its worst in four years and lower than 6.6 per cent seen previously, while the inflation was pegged at 4.8 per cent.
The repo rate (repurchase rate) is the interest rate at which the central bank lends money to commercial banks when there is a shortage of funds. When repo rate is high, borrowing costs for banks increase, which is often passed on to consumers in the form of higher interest rates on loans. Conversely, a lower repo rate usually results in lower interest rates on loans such as home loans, car loans, and personal loans.
Shanti Ekambaram, Deputy Managing Director, Kotak Mahindra Bank said” In line with market expectations the RBI announced a 25 Bps Repo rate cut – this after nearly 5 years. Interesting takeaway was the need for considering “ flexible inflation targeting” , which will help balance inflation and growth. The stance however was retained at Neutral more due to potential risks from volatile global markets. GDP growth in FY’26 is estimated at 6.7%and average inflation at 4.2%. Expect RBI to remain vigilant and do what it takes to ensure adequate liquidity to support growth but also keeping an eye on inflation. Future action will depend on global headwinds and local macro-economic factors.
Commenting on the MPC decision, Radhika Rao, senior economist, DBS Bank, said an emphasis on the flexibility of the inflation targeting framework suggests the MPC might be more tolerant of intermittent modest supply-driven volatility.
The GDP forecasts point to growth staying below 7 per cent this year and the next.
“This sees the RBI joining regional central banks who have given higher weightage to domestic priorities, viewing volatility in their currency and bond markets as driven by global triggers. The MPC has refrained from an outright dovish signal by maintaining the stance at neutral,” she said.
Commenting on the MPC decision Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank; “The MPC’s decision to cut Repo rate by 25bp and maintain neutral stance is completely in line with our expectations. The softening growth and inflation outlook has provided room to monetary easing. Further from here , we expect the RBI will need to monitor liquidity conditions more closely to ensure liquidity stance remains in sync with the policy stance.”
Suman Chowdhury, chief economist, Acuité Ratings & Research, said the tone of the Governor’s speech seems to suggest that the approach to inflation targeting will be a little more flexible.
“We believe that RBI MPC has initiated a shallow rate cycle with low visibility and limited clarity on the future rate cuts. The retention of the neutral stance highlights that the policy direction may be revised depending on the incoming data points and the external environment,” Chowdhury added.
Anu Aggarwal, Head of Corporate Banking, Kotak Mahindra Bank, Said “The Reserve Bank of India’s decision to reduce the repo rate by 25 basis points underlines its contribution in stimulating economic growth. The monetary policy decision will further support the Union Budget’s focus on boosting demand which will together reinforce growth and confidence in the economy. The RBI’s decision has come at an opportune time as India attempts to gets into it high growth trajectory as against the 6.4% of FY25.”
The RBI has announced the much expected 25 bps repo rate cut – focused on cautious growth, while remaining aligned to a durable inflation target! Headwinds stemming from global volatility seems to be high on RBI’s radar, as they maintained a neutral stance, while all domestic markers – Inflation, Agri & Mfg. activity, Consumption demand, Liquidity & Financial Markets – are showing a directionally positive flavor. For me, takeaway of the policy is, “be prepared for a smoother albeit slower ride, than a bumpy fast-paced one!” Said Manish Kothari, President & Head Commercial Banking, Kotak Mahindra Bank Limited
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