Loans to get cheaper as RBI cuts repo rate

New Delhi: The Reserve Bank of India (RBI) on Wednesday cut policy interest rate by 25 basis points (0.25 per cent) amid signs of easing inflation but lowered its India economic growth projection for 2025-26 to 6.5 per cent from 6.7 per cent, citing risks from global trade disruptions.

The six-member Monetary Policy Committee (MPC) unanimously decided to cut the repo rate from 6.25 per cent to 6 per cent. This is the second cut in the repo rate this year, which is the interest at which the central bank lends to commercial banks.

The MPC also unanimously decided to change its policy stance from “neutral” to “accommodative”, thus keeping the door open for further rate cuts in the upcoming monetary policy meetings.

Lower repo rates lead to lower interest rates charged by banks, thus reducing cost of borrowing for customers and businesses, and triggering a consumption boost in the economy.

“The MPC noted that inflation is currently below the target, supported by a sharp fall in food inflation,” said RBI Governor Sanjay Malhotra.

“Moreover, there is a decisive improvement in the inflation outlook. According to projections, there is now greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon,” Malhotra added.

“On the other hand, impeded by a challenging global environment, growth is still on a recovery path after an underwhelming performance in the first half of 2024-25. In such challenging global economic conditions, the benign inflation outlook and moderate growth demand that the MPC continues to support growth,” he added.

Other policy interest rates have also been lowered. The standing deposit facility (SDF) rate has been cut by 25 basis points to 5.75 per cent and the marginal standing facility (MSF) and the bank rate to 6.25 per cent from 6.5 per cent. These guide interest rates on lending and deposits by the commercial banks.

“The MPC’s decision to ease repo rate by 25 bps and shift its stance to accommodative is in line with expectations. We note the increasing global turmoil and its spillovers to the Indian growth slowdown will necessitate the MPC for deeper rate cuts. We see scope for additional 75-100 bps of rate cuts in the year ahead, depending on the scale of global slowdown,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

The central bank also lowered its projection on the headline retail inflation for the current financial year to 4 per cent from its earlier forecast of 4.2 per cent, assuming a normal monsoon.

“The rate cut is expected to boost investor sentiment, improve financing conditions, and accelerate momentum in demand. Specifically, it is expected to make home loans more affordable and spur growth in the mid-range and affordable housing markets,” said Anshuman Magazine, Chairman & CEO, India, Southeast Asia, Middle East & Africa, CBRE.

Confederation of Indian Industry (CII) Director General Chandrajit Banerjee underlined the need for further rate cuts saying the real interest rate, after adjusting with inflation, remained high despite the recent lowering in the policy repo rate.

“CII is of the view that RBI’s accommodative monetary policy combined with the government’s growth-centric fiscal policy will help to boost domestic growth amid global economic turmoil,” said Banerjee.