RBI Cuts Interest Rates After Five Years | What It Means for the Economy : In a significant policy move, the Reserve Bank of India (RBI) has reduced its policy interest rate by 25 basis points (bps) to 6.25%—the first rate cut in almost five years. This decision marks a shift from the rate-hike cycle that had been in place since May 2022, as the central bank aims to support economic growth. The rate cut comes days after Finance Minister Nirmala Sitharaman announced a pro-growth Union Budget for 2025–26, which included major tax breaks for the middle class.
Why Did the RBI Cut Interest Rates?
Policy Pivot to Support Growth
The Monetary Policy Committee (MPC) unanimously decided to cut the policy repo rate to 6.25% in response to a slowing economy. This is the first rate reduction since May 2020, and it follows a pause in rate hikes after six consecutive increases totaling 250 basis points between May 2022 and February 2023.
“Fiscal and monetary policies should work in tandem,” said Finance Secretary Tuhin Kanta Pandey, hinting at the need for a coordinated approach to boost economic growth.
Key Drivers for the Rate Cut
- Slowing Economic Growth: The Indian economy has slowed to its lowest pace since the pandemic.
- Pro-Growth Union Budget: The 2025–26 Budget introduced significant tax relief and measures to boost consumption.
- Improved Fiscal Deficit Projections: The fiscal deficit is now projected at 4.8% of GDP for FY25, down from the earlier target of 4.9%.
Budget 2025–26: A Catalyst for Rate Cuts
The Union Budget played a crucial role in shaping the latest monetary policy decision. Key highlights of the Budget include:
- Income Tax Relief: The Budget offered significant income tax cuts, benefiting around 1 crore taxpayers.
- Fiscal Deficit Target: FY26 fiscal deficit projected at 4.4%, lower than the consolidation roadmap target.
These measures are aimed at boosting consumer spending and driving economic recovery, prompting the RBI to adopt a more accommodative stance.
Impact of the Interest Rate Cut
For Borrowers
- Lower EMIs: Home loans, auto loans, and personal loans are likely to become cheaper, offering relief to borrowers.
- Better Access to Credit: Lower interest rates encourage borrowing and investment.
For Businesses
- Cheaper Business Loans: Reduced borrowing costs can help businesses expand and invest in growth opportunities.
- Improved Consumer Demand: Tax relief and lower interest rates are expected to boost consumption.
For the Economy
- Growth Support: The rate cut, coupled with fiscal support from the Budget, is expected to stimulate growth.
- Controlled Inflation: The rate cut aligns with the government’s efforts to maintain inflation within manageable limits while supporting growth.
Table: Key Changes in RBI Policy Rates
| Date | Policy Rate | Change |
|---|---|---|
| May 2020 | 6.25% | -25 bps |
| February 2023 | 6.50% | +25 bps |
| February 2025 | 6.25% | -25 bps |
Conclusion
The RBI’s decision to cut interest rates for the first time in nearly five years is a clear signal that the central bank is prioritizing growth amid a slowing economy. Coupled with the pro-growth measures in the Union Budget 2025–26, this move is expected to provide much-needed relief to both consumers and businesses. As India navigates economic recovery, a coordinated approach between fiscal and monetary policies will be crucial to achieving sustainable growth.
FAQs
What is the current RBI repo rate?
As of February 2025, the RBI repo rate stands at 6.25% following a 25 bps cut.
Why did the RBI reduce interest rates?
The rate cut was aimed at supporting economic growth after the economy slowed to its lowest pace since the pandemic.
How will the rate cut impact home loans?
With lower interest rates, borrowers can expect a reduction in EMIs for home loans, making borrowing more affordable.
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