Big Boost to Indian Economy: RBI cuts interest rates by 25 basis points to 6.25% for first time in nearly 5 years

The Reserve Bank of India's (RBI) six-member Monetary Policy Committee (MPC) on Friday cut the repo rate by 25 basis points to 6.25 per cent. RBI Governor Sanjay Malhotra said the MPC has also unanimously decided to continue with a neutral stance and will focus on inflation while supporting growth. This would provide flexibility to respond to the macroeconomic environment, he added.

He said that inflation has declined and is expected to further moderate and gradually align with the RBI's target.

Malhotra said the RBI was committed to providing sufficient liquidity in the economy and would take steps to ensure durable liquidity to meet the requirement of the system.

He also said that the RBI was keeping a close watch on the rupee and was taking all steps to keep the Indian currency stable. Growth in the Indian economy is also expected to pick up growth momentum
and rural demand has already revived, he said. However, there are uncertainties in global trade and climate change also poses a risk to growth, the RBI Governor said.

Malhotra also said that the MPC felt that excessive volatility in global financial markets and global trade policies calls for the MPC to remain watchful.

The RBI's monetary policy announcement comes close on the heels of the Budget 2025-26. The finance minister has decided to stick to the fiscal consolidation path with a reduction in the fiscal deficit target to 4.4 per cent of GDP for 2025-26 from 4.8 per cent earlier, which has reduced the need for market borrowing by the Government.

This leaves more headroom for the RBI to adopt a soft money policy to spur growth.

Malhotra, is a former finance ministry official and has already announced the injection of Rs 1.5 lakh crore in the banking system as the liquidity situation had become tight in the financial sector.

The government has reduced its net market borrowings estimate for the 2025-26 financial year to Rs 11.54 lakh crore which will leave more money in the banking system for giving out loans to corporates for investment and spur demand through consumer spending to accelerate growth.

According to senior officials, both the fiscal measures announced in the budget and the RBI's monetary policy will be aligned to accelerate growth along with price stability.

The Budget has rolled out significant income tax cuts for the middle class as 1 crore individuals earning up to Rs 12.75 lakh a year will not pay any tax and will have more money in their hands to spend on goods and services. This will add to aggregate demand in the economy, giving a fillip to growth.

-IANS