RBI’s first rate cut in five years is small but can be effective

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Subscribe to enjoy similar stories. Last week’s monetary policy meeting has several firsts to its credit: It was the first of 2025, the first under a new governor of the Reserve Bank of India (RBI), the first since Donald Trump became US president, and the first in five years to cut the repo rate. The policy pivot was widely expected: Recent off-policy measures to infuse liquidity already signalled a high chance of the same.

The banking system has been facing a severe liquidity deficit since December. Total money created by the RBI—or base money—grew by 3.5% (year-on-year) in the week ending 24 January, far lower than the 6.3% growth in the comparable week of 2024. Growth in ‘broad money’ has also slowed down.

Some of this systemic tightness was due to routine outflows (advance tax, goods and services tax payments). However, the RBI’s interventions in the forex market to prop up the rupee were also a big contributor. These issues have been somewhat addressed in recent weeks.

The rupee has been allowed to depreciate a little, and the RBI has infused durable liquidity through open market operations, swaps and a cash reserve ratio (CRR) cut. The result is that the RBI’s operational target—the call money rate, or the interest rate charged by lenders for short-term loans to each other—is closer to the policy repo rate and has fewer spikes beyond the RBI’s ‘policy corridor’(see chart). Tighter provisioning norms for project financing and liquidity coverage have been deferred until at least 31 March 2026.