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With an aim to support a shuttering economy, the Reserve Bank of India (RBI) has cut interest rate for the first time in nearly five years. Its Monetary Policy Committee (MPC) has reduced the repo rate by 25 basis points (bps) to 6.25 per cent, after having kept it unchanged at 6.50 per cent for eleven straight meetings, and not having lowered it since May 2020. Consequently, the standing deposit facility (SDF) rate shall stand adjusted to 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent. The last revision of rates happened in February 2023 when the policy rate was hiked by 25 basis points to 6.5 per cent. The RBI MPC has decided unanimously to continue with its 'neutral' stance and remain ‘unambiguously focused on a durable alignment of inflation with the target, while supporting growth’.

Besides, for FY25, RBI maintained its projections for consumer price index (CPI)-based inflation at 4.8 per cent. It noted that food inflation pressures should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects. Core inflation is expected to rise but remain moderate. Further, assuming a normal monsoon next year, CPI inflation for 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4.0 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent.

On the economy front, Gross domestic product (GDP) forecast for financial year 2025-26 (FY26) has been pegged at 6.7 per cent. Healthy rabi prospects, expected recovery in industrial activity and resilient services exports are likely to support economic growth. Moreover, growth rate for Q1FY26 projected at 6.7 per cent, for Q2FY26 at 7.0 per cent, and for Q3FY26 and Q4FY26 at 6.5 per cent each. It also noted that household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26. 

In his first Monetary Policy announcement, RBI Governor Sanjay Malhotra highlighted the challenges posed by the global economic landscape, noting that while high-frequency indicators suggest resilience and expansion in trade, overall global growth remains below historical averages. He said ‘Progress on global disinflation is stalling, hindered by services price inflation’. Discussing global financial market dynamics, he pointed out that expectations regarding the size and pace of rate cuts in the United States had led to a strengthening of the US dollar. This, in turn, resulted in hardened bond yields and significant capital outflows from emerging markets, causing sharp currency depreciations and tighter financial conditions. 

Despite these headwinds, he assured that the Indian economy remains strong and resilient, though not entirely immune to external pressures. he acknowledged ‘The Indian rupee has come under depreciation pressure in recent months.’ However, he reassured that the RBI is actively using all available tools to address the multifaceted challenges facing the economy.