Reserve Bank of India (RBI) Governor Sanjay Malhotra waits to speak to the media after a news conference in Mumbai, February 7, 2025.
Credit: Reuters Photo
Barely a week after the income tax relief announced in the Union Budget, the middle-class got another reason to cheer as the Reserve Bank of India (RBI) on Friday decided to lower the key policy rate by 25 basis points that would lead to reduction in EMIs on home, car and personal loans.
The RBI Monetary Policy Committee headed by newly appointed Governor Sanjay Malhotra decided to cut the repo rate, interest rates at which the central bank lends to commercial banks, by 25 basis points (0.25%) to 6.25%. This is the first cut in the policy rate by the RBI in nearly five years, the last one being in May 2020, amid the Covid pandemic disruptions.
This was the first time in a year when the six-member panel took a unanimous decision on interest rates. All the MPC members voted in favour of the rate cut. The last unanimity was in December 2023 when the panel had decided to keep the rates unchanged.
In his first monetary policy statement as RBI Governor, Malhotra said the MPC’s unanimous decision on rate cut took into account the favourable outlook on inflation and low economic growth.
The MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, inflation is expected to moderate further in 2025-26, gradually aligning with the target. The MPC also noted that though growth is expected to recover from the low seen in the second quarter of 2024-25, it is much below that of the previous year. India’s gross domestic product (GDP) growth dipped to a seven-quarter low of 5.4% in July-September 2024 period.
“These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focused on aligning inflation with the target. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points,” Malhotra said.
The cut in repo rate will pave the way for lower lending rates by the commercial banks and reduce EMIs, providing relief to home, car and personal loan borrowers. Savings in interest rates would allow consumers to spend more.
The RBI’s action comes on the heels measures announced in the Budget for boosting consumption and providing relief to the middle-class.
In the budget presented on February 1, Finance Minister Nirmala Sitharaman announced substantial tax relief by raising basic income tax exemption and rebates. As a result, income up to Rs 12.75 lakh will attract zero tax in 2025-26 against the current fiscal’s Rs 7.75 lakh.
“The RBI decision to start the easing cycle with a 25-bps cut was timely, contextual and also well communicated with respect to regulatory changes in transition to ensure a seamless and non-disruptive manner,” said C S Setty, Chairman, State Bank of India.
“We believe this rate cut will provide a boost to the economy and stimulate investment and consumer demand, fostering overall economic momentum,” Ajay Kumar Srivastava, Managing Director & CEO, Indian Overseas Bank.
The MPC has also unanimously decided to keep the policy stance neutral. This leaves the room for the central bank to further ease the interest rate in the next meeting, which will be held in April.
“This much-awaited move by the RBI is poised to significantly boost the housing segment by stimulating demand, particularly among first-time homebuyers,” said Anshuman Magazine, Chairman & CEO, India, Southeast Asia, Middle East & Africa, CBRE.
Chairman of National Real Estate Development Council (NAREDCO) Niranjan Hiranandani said the reduction in interest rate signals a renewed sense of resilience in India’s economic policy. “Combined with the tax benefits announced in the FY26 budget for the middle class, this policy change will boost sales velocity,” he said.