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Economy

RBI slashes interest rates for first time in 5 years

RBI Governor Sanjay Malhotra announced on Friday a 25-basis point reduction in the key lending rate, lowering it to 6.25 per cent. He highlighted global economic challenges, emphasising resilience in the Indian economy despite currency depreciation and financial market volatility.

News Arena Network - New Delhi - UPDATED: February 7, 2025, 04:50 PM - 2 min read

RBI Governor, Sanjay Malhotra.


In his first monetary policy review as Governor, Sanjay Malhotra announced on Friday that the Reserve Bank of India (RBI) has cut the benchmark repo rate by 25 basis points (bps), bringing it down from 6.5% to 6.25%.

 

The decision was taken unanimously by the six-member Monetary Policy Committee (MPC) following a three-day meeting.

 

Malhotra highlighted the persistent challenges posed by global economic dynamics, particularly noting the stalling progress on global disinflation due to rising service prices.

 

“The global economic backdrop remains challenging. The global economy is growing below the historical average, even though high-frequency indicators suggest resilience, along with continued expansion in trade. Progress on global disinflation is stalling, hindered by services price inflation,” he remarked.

 

The governor further acknowledged the recent strengthening of the US dollar due to expectations surrounding the pace and scale of rate cuts in the United States.

 

This has led to hardened bond yields and substantial capital outflows from emerging markets, including India.

 

“Bond yields have hardened, emerging market economies have witnessed large capital outflows, leading to sharp depreciation of their currencies and tightening of financial conditions. Divergent trajectories of monetary policy across advanced economies, lingering geopolitical tensions and elevated trade and policy uncertainties have exacerbated financial market volatility,” Malhotra explained.

 

 

Despite these headwinds, Malhotra assured that India’s economy remains strong and resilient, though not entirely insulated from external pressures.

 

He noted that the rupee has come under depreciation pressure in recent months but assured that the RBI is actively utilising all available tools to mitigate the impact of external shocks.

 

“The Indian rupee has come under depreciation pressure in recent months,” Malhotra said.

 

However, he reassured that the RBI is “actively using all available tools to address the multifaceted challenges facing the economy.”

 

The policy review also stressed the importance of maintaining a balance between inflation management and growth objectives.


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The latest rate cut comes in the wake of the December 2024 MPC meeting, where the central bank had reduced the cash reserve ratio (CRR) by 50 basis points to 4% but kept the repo rate unchanged at 6.5%.

 

Economists have largely welcomed the rate cut, viewing it as a move to support growth amidst global uncertainties. Market analysts have suggested that the rate reduction may provide a boost to liquidity in the money markets and stimulate investment.

 

Ajay Bagga, a prominent market and banking expert, stated, “This raises the chance that the RBI could pause for now and wait for the initial months of Trump 2.0 to pass. We feel RBI will seize the chance to cut today, will provide more liquidity to the money markets and will keep its inflation and GDP growth targets in line with the recent Union Budget and Economic Survey.”

 

Looking ahead, Malhotra stressed that the RBI would continue to monitor inflation trends and external economic factors while remaining committed to supporting domestic economic stability and growth.

 

The market will now closely scrutinise the RBI’s guidance on liquidity measures and future rate trajectory, with expectations of a dovish stance likely to bolster investor sentiment.

 

However, analysts cautioned that persistent global headwinds and geopolitical uncertainties might keep equities range-bound in the short term.

Also read: Union Cabinet poised to approve new Income Tax Bill

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