RBI cuts repo rate to 6.25% for the first time in nearly five years to support growth amid cooling inflation. Markets react mildly as economists foresee further easing ahead.

The Reserve Bank of India (RBI) reduced its key repo rate by 25 basis points to 6.25% on Friday, February 7, marking the first interest rate cut in nearly five years. This move comes as part of a broader effort to support India’s sluggish economy amid cooling inflation.

The rate cut is the first since May 2020, when the pandemic prompted aggressive monetary easing. Since then, the RBI focused on controlling inflation, which had remained above the 4% target for much of the period.

Following the announcement, India’s stock markets reacted with mild declines, with the Nifty 50 index dropping 0.5%. The yield on 10-year government bonds rose to 6.7%, and the rupee weakened slightly against the dollar.

The RBI’s updated forecasts project a real GDP growth of 6.7% for the next fiscal year, with inflation expected at 4.2%. For the current fiscal year, the RBI downgraded growth expectations to 6.4%, its weakest forecast in four years, from 6.6%. Inflation is projected at 4.8% for the fiscal year ending in March.

Although the MPC maintained a “neutral” policy stance, contrary to some predictions of a shift to "accommodative," further rate cuts could be on the horizon, according to economists like Shilan Shah from Capital Economics. He forecasts a total of 75 basis points in cuts during this cycle, given the soft patch expected in the economy over the next few quarters.

The RBI’s decision marks a key pivot in India’s monetary policy, as the central bank seeks to foster economic recovery in a challenging global environment.

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