RBI MPC Meeting 2025: RBI cuts lending rate by 25 basis points to 6.25%

RBI Governor Sanjay Malhotra during a press conference at RBI headquarters in Mumbai on February 7, 2025.
| Photo Credit: PTI

Lowering India’s interest rates for the first time in the last 57 months, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday unanimously cut the repo rate by 25 basis points (bps) to 6.25%, to support fading growth in the hope of inflation easing to 4.4% in this quarter and 4.2% through 2025-26.

The central bank’s policy shift, that may translate into cheaper loans for homes, cars and other purposes, comes within a week of the Union Budget for 2025-26 that seeks to drive growth by stimulating urban demand with income tax breaks worth ₹1 lakh crore.

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The repo rate is the rate at which the RBI lends to other banks, and one basis point equals 0.01%. This is the first repo rate cut since the early days of the COVID-19 pandemic, when the RBI made a 40 bps cut to 4% in May 2020 and held it there for a couple of years. Since 2022, the repo rate has been on the rise.

‘Neutral stance’

In view of the risks from global uncertainties and upside risks to inflation, the MPC decided to persist with a neutral monetary policy stance, and stay “unambiguously focussed on a durable alignment of inflation with the target, while supporting growth,” RBI Governor Sanjay Malhotra said after the first monetary policy review under his stewardship.

Stating that headwinds from geopolitical tensions, protectionist trade policies, volatility in international commodity prices, and financial market uncertainties continue to pose downside risks to the outlook, the MPC has projected a real GDP growth of 6.7% for 2025-26 from the 6.4% estimated this year.

Assuming a normal monsoon next year, Mr. Malhotra said that the MPC expected the declining inflation to further moderate in the coming year, gradually aligning with the target. Inflation is projected to average 4.5% through the first quarter (Q1) of 2025-26, 4% in Q2, 3.8% in Q3, and 4.2% in Q4. The risks are evenly balanced, he said.

Mixed signals

“Rural demand continues to be on an uptrend, while urban consumption remains subdued with high frequency indicators providing mixed signals. Going forward, improving employment conditions, tax relief in the Union Budget, and moderating inflation, together with healthy agricultural activity bode well for household consumption,” the RBI Governor said.

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Noting that the MPC had factored in the rupee’s recent decline in its policy math, Mr. Malhotra emphasised that the RBI’s stated objective was to maintain orderliness and stability in the currency market, without compromising market efficiency. “Accordingly, our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the Indian Rupee is determined by market forces,” he asserted.

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Liquidity crunch

India’s current account deficit is likely to remain well within “the sustainable level”, the RBI Governor said, adding that foreign exchange reserves stood at $630.6 billion as on January 31 this year, providing an import cover of over 10 months. “Overall, India’s external sector remains resilient as key indicators stay robust,” Mr. Malhotra concluded.

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Acknowledging that liquidity has been tight over December and January, Mr. Malhotra announced fresh initiatives to ease the crunch. “We will continue to monitor the evolving liquidity and financial market conditions, and proactively take appropriate measures to ensure orderly liquidity conditions as may be required for the system… not just overnight liquidity, but also durable liquidity,” he said.