Mumbai, Feb 7: Home, auto, and personal loans are expected to become more affordable after the Reserve Bank of India (RBI) reduced its key benchmark rate for the first time in nearly five years under the leadership of its new Governor. The rate cut aims to stimulate a sluggish economy.
The RBI’s Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, lowered the repo rate by 25 basis points to 6.25%. This marks the first rate reduction since May 2020 and the first revision after two and a half years.
Governor Malhotra, a former bureaucrat who took office shortly after the last MPC meeting in December, projected that India’s economy would grow by 6.7% in the fiscal year starting April 2025. He also forecasted a reduction in inflation to 4.2%.
Malhotra emphasized that the growth-inflation dynamic offers room for the MPC to prioritize supporting growth while managing inflation. He noted that the RBI will remain committed to aligning inflation with the target while fostering economic growth. For the fiscal year ending March 31, the RBI estimated the growth rate at 6.4%, the lowest in four years, with inflation at 4.8%.
While the previous governor focused on reducing inflation to 4%, Malhotra’s approach leans more toward encouraging growth in the context of inflation. Despite the rate cut, the MPC retained a neutral stance, suggesting a cautious approach toward future rate reductions.
The repo rate, which is the interest rate at which the RBI lends money to commercial banks, influences borrowing costs. A lower repo rate typically results in reduced interest rates on loans such as home, auto, and personal loans, making them more affordable.
Additionally, the repo rate impacts returns on savings and investment products. A higher repo rate offers better returns on savings instruments, while a lower rate might reduce returns. The MPC, consisting of three RBI members and three external experts, unanimously agreed to reduce the repo rate to 6.25%.
Malhotra explained that inflation has moderated due to favorable food outlooks and continued transmission of past monetary policy actions. This is expected to further align inflation with the 4% target in the fiscal year 2025-26.
Despite this, growth remains below previous levels, with a 5.4% expansion in Q2 2024, which was the slowest in almost two years. However, growth is projected to recover, giving the MPC more flexibility to support economic expansion.
Following a peak in October, consumer price inflation declined to 5.22% in December and 5.48% in November, although it remains above the 4% target. The MPC is adopting a more flexible stance, suggesting that modest inflation volatility might be tolerated.
Governor Malhotra stressed that the RBI is committed to maintaining price stability while fostering sustained growth and financial stability. In a post-policy briefing, he emphasized that foreign exchange intervention would aim to reduce excessive volatility, but not target a specific exchange rate.
While the rupee strengthened marginally to 87.47 against the US dollar after the policy announcement, the governor assured that the RBI would be proactive in managing liquidity to meet financial system needs.
Economists reacted positively to the rate cut, with analysts predicting a boost to consumption and retail credit, although the full impact may take time. Experts also noted that floating-rate loans and structured products would benefit from the decision.
