India’s central bank has implemented its first interest rate reduction in nearly five years in response to the deceleration of growth in the country’s economy, which ranks third in Asia.
The Reserve Bank of India (RBI) has lowered its repo rate from 6.5% to 6.25%, aligning with the forecasts of numerous economists.
The repo rate represents the interest rate at which the central bank extends loans to commercial banks.
This adjustment occurs as India’s GDP growth is projected to decline to a four-year low of 6.7%.
RBI Governor Sanjay Malhotra indicated that the bank is maintaining a “neutral” policy stance, which would provide additional flexibility to foster growth, suggesting the possibility of further rate reductions.
Investment growth and urban consumption in the world’s fastest-growing major economy have shown signs of weakness. Additionally, corporate profits have decreased during the first half of the current financial year.
Nevertheless, Mr. Malhotra noted that easing inflation, a rise in rural demand, and favorable agricultural output are expected to bolster growth.
The rate cut may result in slightly lower interest rates for mortgages and credit cards, as well as reduced borrowing costs for businesses.
This decision by the central bank follows a series of previously announced measures, including an $18 billion injection into the domestic banking system to alleviate a cash shortage.
In December, the RBI also reduced the cash reserve ratio—the portion of reserves that commercial banks must hold with the RBI—by half a percent.
The RBI’s rate adjustment comes in the wake of the Union Budget’s provision for a $12 billion tax cut aimed at supporting the struggling middle class.
Despite these efforts, Mr. Modi’s administration is focused on curbing expenditures to address the budget deficit. Given the limited scope for fiscal stimulus, economists anticipate that the central bank may further reduce rates by 0.5% to 1% to stimulate growth, according to various projections.
However, the RBI’s challenges are compounded by global uncertainties stemming from US President Donald Trump’s tariff policies, capital outflows from foreign investors, and a depreciating currency, which could weaken further if rates are lowered.
The Indian rupee is currently trading at near-historic lows, primarily as a result of significant foreign investor withdrawals from the stock markets in recent months.
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