India's central bank has lowered interest rates for the first time in nearly five years to address the slowing growth in Asia's third-largest economy. The Reserve Bank of India (RBI) reduced its repo rate from 6.5% to 6.25%, in line with the expectations of many economists. The repo rate signifies the rate at which the central bank lends to commercial banks.
This move comes as India's GDP growth is anticipated to slow to a four-year low of 6.7%. RBI governor Sanjay Malhotra stated that the bank maintains a "neutral" policy stance, allowing greater flexibility to support growth, hinting at potential further rate cuts.
Declining investment growth and urban consumption in the fastest-growing major economy globally, coupled with decreasing corporate profits in the first half of the fiscal year, have underscored the need for such measures. Despite these challenges, moderating inflation, rising rural demand, and a favorable agricultural output are expected to support growth, according to Mr. Malhotra.
The rate cut is likely to result in slightly lower mortgage and credit card interest rates, as well as reduced borrowing costs for companies. The central bank's decision follows a series of prior measures, including an infusion of $18 billion (£14.48 billion) into the domestic banking system to ease cash shortages in the economy. The cash reserve ratio was also reduced by 0.5% in December.
The RBI's actions, in the backdrop of the Union Budget's $12 billion tax reduction for the struggling middle class, appear pivotal. While the government of Mr. Modi aims to curb spending to alleviate the budget deficit, limited scope for fiscal stimulus prompts economists to anticipate further rate cuts of 0.5%–1% to foster growth amidst global uncertainties fueled by US President Donald Trump's tariff disputes, foreign capital outflows, and currency depreciation concerns.
The Indian rupee has been trading near historic lows due to substantial foreign investor outflows from stock markets in recent months.