The last revision of rates happened in February 2023 when the policy rate was hiked by 25 basis points to 6.5%.
| Photo Credit: Reuters

India Inc. welcomed the Reserve Bank of India’s (RBI) move to slash the benchmark interest rate for the first time in nearly five years on Friday (February 7, 2025) and asserted that it will complement the consumption-boosting measures announced in the last week’s Budget, providing much-needed support to the economy.

Industry bodies were of the view that the Reserve Bank’s 25 basis points rate cut to 6.25%, which comes after the last rate reduction in May 2020, sets the stage for further easing of interest rates over the near term. The last revision of rates happened in February 2023 when the policy rate was hiked by 25 basis points to 6.5%.

“This calibrated approach by the Central Bank reflects a careful balance between fostering economic growth and maintaining financial stability. The rate cut is anticipated to complement the consumption-boosting measures announced in the Union Budget 2025-26, providing a boost to domestic demand drivers,” Chandrajit Banerjee, Director General at CII, said.

“We believe that the easing inflation trend and non-inflationary fiscal policy have provided the RBI with the opportunity to continue its rate cut cycle and implement a larger rate cut once financial conditions become favourable,” he said.

FICCI president Harsha Vardhan Agarwal welcomes RBI’s decision to cut the repo rate by 25 basis points and said the move will provide much-needed support to the economy at this juncture.

He termed the RBI’s decision to ease the policy rate as a timely and forward-looking step, hoping that the banking sector would follow through on this cue and a lowering of lending rates would be seen.

“Further, while RBI has maintained a neutral stance with regard to Monetary Policy, the indication towards a more flexible interpretation of inflation targeting sets the stage for further rate cuts over the near term,” Mr. Agarwal added.

“The Budget has laid a strong foundation for investment-led growth emphasising manufacturing, MSMEs (micro, small and medium enterprises) and infrastructure. The rate cut complements these measures, lending further support to India’s growth outlook,” the FICCI President observed.

Hemant Jain, president, PHDCCI, stated that the reduction in the repo rate will lead to increased investment, higher consumer spending, enhanced production and accelerated overall economic growth.

A RBI working paper has found that equity markets are affected more by the changes in the market’s expectations of future monetary policy than the policy rate surprise. File
| Photo Credit: Reuters

Equity markets are impacted more by the expectations of future monetary policy than the policy rate surprises on the day of announcement of the policy by the Reserve Bank, said an analysis.

According to a working paper prepared by RBI officials, the regulatory and development measures that are announced along with the monetary policy also impact the stock markets.

“Equity markets are affected more by the changes in the market’s expectations of future monetary policy (path factor) than the policy rate surprise (target factor) which is in agreement with the conventional thinking that equity markets are forward-looking,” the paper said.

The volatility in equity markets on the day of the policy announcement, it said, “is affected by both target and path factors, as markets digest the policy announcements and traders adjust their portfolios throughout the day”.

RBI Working Paper on ‘Equity Markets and Monetary Policy Surprises’ is prepared by Mayank Gupta, Amit Pawar, Satyam Kumar, Abhinandan Borad and Subrat Kumar Seet from the Department of Economic and Policy Research, Reserve Bank of India.

Understanding the impact of monetary policy announcements on the returns

The paper analyses the impact of monetary policy announcements on the returns and volatility in the BSE Sensex by decomposing changes in Overnight Indexed Swap (OIS) rates on policy announcement days into target and path factors. The target factor captures the surprise component in central bank policy rate action, while the path factor captures the impact of the central bank’s communication on market expectations regarding the future path of monetary policy.

While the short duration windows are aimed at controlling for other potential drivers of equity prices, it may be noted that the monetary policy announcements are accompanied by regulatory and developmental measures which can also impact markets, the paper said.

The sparse trading on occasions in the OIS markets and other domestic and global developments during the narrow window can also impact the analysis, it added.

The analysis covers the period starting with the implicit adoption of a flexible inflation targeting regime in India (January 2014) and ends in July 2022.

The Reserve Bank of India (RBI) introduced the RBI Working Papers series in March 2011. The central bank said the views expressed in the paper are those of the authors and not necessarily those of the institution(s) to which they belong.