RBI kicks off rate cut cycle—what it means for borrowers and markets

The long-awaited policy rate easing by the Reserve Bank of India (RBI) is finally here. With inflation cooling from recent peaks, GDP growth dipping marginally, and global central banks shifting to accommodative policies, expectations were high ahead of the latest monetary policy review. 

The announcement did not disappoint—RBI has cut the repo rate from 6.5% to 6.25%.

This marks the first rate action by the RBI’s Monetary Policy Committee (MPC) in two years, following a hike in February 2023. Since then, inflation has largely remained under control, barring occasional spikes driven by food prices. With nearly half of the Consumer Price Index (CPI) basket comprising food-related items, inflation in India often stems from climate-induced supply disruptions—beyond the control of monetary policy.

RBI’s projections for CPI inflation stand at 4.8% for FY25 and 4.2% for FY26, edging closer to its 4% target. Meanwhile, GDP growth, at 5.4% in the July–September 2024 quarter, is estimated at 6.5% for the full fiscal year—below India’s potential growth rate, warranting monetary support.

The Indian rupee has weakened against the US dollar, though less than many global currencies. With fiscal consolidation progressing—the fiscal deficit for FY25 revised downward to 4.8% of GDP from the interim budget’s 5.1% estimate, and further reduced to 4.4% for FY26—there is little justification for maintaining elevated interest rates to defend the currency.

Read this | Mint Primer: Is the rupee on course for a bottomless fall?

Another crucial factor in the policy rate cut is banking system liquidity. The RBI’s forex market interventions to stabilize the rupee had tightened liquidity. However, recent measures have eased the liquidity crunch,