RBI Cuts Repo Rate by 25 bps to 6.25% After 5 Years to Boost Growth
RBI Slashes Repo Rate by 25 bps to 6.25%
The Reserve Bank of India (RBI) announced a historic 25 basis points (bps) repo rate cut on February 7, 2025, lowering the benchmark lending rate to 6.25%—the first reduction since May 2020. The Monetary Policy Committee (MPC), under new Governor Sanjay Malhotra, voted unanimously for the cut, citing easing inflation, slowing GDP growth, and global economic uncertainties. The central bank retained its “neutral” policy stance, prioritizing durable inflation control while supporting growth.
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This decision follows months of fiscal tightening and aligns with the Union Budget 2025’s focus on reviving consumption through income tax reforms. With retail inflation moderating to 5.22% in December 2024 and Q2 FY25 GDP growth slipping to a seven-quarter low of 5.4%, the RBI aims to stimulate borrowing and investment.
Key Highlights of RBI’s Monetary Policy Announcement.
| Parameter | Details |
|---|---|
| Repo Rate | Reduced by 25 bps to 6.25% (from 6.50%) |
| Inflation Projections | FY25: 4.8%; FY26: 4.2% (Q1: 4.5%, Q2: 4%, Q3: 3.8%, Q4: 4.2%) |
| GDP Growth Forecast | FY26: 6.7% (Q1: 6.7%, Q2: 7%, Q3-Q4: 6.5%) |
| Impact on Loans | EMI reductions for home, car, and personal loans (e.g., ₹607/month savings on ₹50L home loan) |
| Global Risks | Trade tensions under Trump’s U.S. presidency, rupee depreciation (~4% since Nov 2024) |
Understanding the Repo Rate Cut.
The repo rate, or the rate at which the RBI lends money to commercial banks, has been a critical tool in managing liquidity and inflation. The recent cut from 6.5% to 6.25% is expected to lower borrowing costs, thereby encouraging investment and consumption. Here’s a detailed look at what this means:
- Lower Borrowing Costs: With a reduced repo rate, banks can borrow at a lower rate from the RBI, which ideally should translate into lower interest rates for loans to consumers and businesses.
- Boost to Investment: Lower interest rates make borrowing more attractive, potentially leading to increased capital expenditure by companies.
- Inflation Management: While the cut aims to spur growth, the RBI must balance this with inflation control, as lower rates could lead to higher inflation if not monitored.
Impact on Borrowers: EMIs Set to Drop.
The rate cut brings immediate relief to floating-rate loan borrowers:
- Home Loans: A ₹50 lakh loan at 8.5% over 20 years will see monthly EMIs drop by ₹607 (from ₹43,059 to ₹42,452), saving ₹7,284 annually.
- Personal Loans: A ₹5 lakh loan at 12% over 5 years will save ₹133/month (₹1,596/year).
- Auto Loans: A ₹10 lakh car loan at 9.5% over 7 years reduces EMI by ₹152/month (₹1,824/year).
Note: Fixed-rate loans remain unaffected, and banks may take weeks to transmit the rate cut fully due to MCLR adjustments.
Impact on Various Sectors.
| Sector | Impact |
|---|---|
| Real Estate | Expected surge in demand for housing loans, potentially boosting sales. |
| Automobile | Lower car loan rates could stimulate sales, especially in the passenger vehicle segment. |
| Manufacturing | Increased investment in machinery and expansion due to cheaper credit. |
| Retail | Consumer spending might increase as disposable income rises with lower EMIs. |
| Banking | Margins might compress, but loan growth could offset this to some extent. |
Macroeconomic Context and RBI’s Strategy.
1. Inflation Control.
The RBI’s flexible inflation targeting framework has stabilized CPI, which is projected to align with the 4% target by FY26. Food inflation, a key driver, is expected to soften with new crop arrivals.
2. Growth Revival.
GDP growth for FY26 is pegged at 6.7%, driven by rural demand and gradual manufacturing recovery. However, urban consumption remains subdued, requiring policy support.
3. Global Headwinds.
Geopolitical tensions, Trump’s tariff wars, and volatile forex markets have pressured the rupee, which hit a lifetime low of 87.58/USD. The RBI emphasized its forex policy focuses on curbing “excessive volatility,” not targeting specific exchange rates.
Expert Insights and Market Reactions.
- SBI Research predicts a 75 bps cumulative rate cut by 2025, with another reduction likely in April.
- Real Estate Sector: NAREDCO urged further cuts to boost housing demand, citing ripple effects on cement and steel industries.
- Stock Markets: Sensex fell 204 points post-announcement, reflecting investor caution amid liquidity deficits and global risks.
Latest Studies and Expert Opinions.
Recent studies by economic think tanks like NCAER and ICRIER suggest that while the repo rate cut is a positive step, its effectiveness will largely depend on:
- Transmission: How effectively banks pass on the rate cut to consumers.
- Global Factors: External economic conditions, including oil prices and trade policies, will influence the outcome.
- Domestic Policy: Government policies on infrastructure, taxation, and reforms will play a crucial role in complementing the RBI’s efforts.
FAQs: Your Questions Answered.
Q1. How much will EMIs decrease after the repo rate cut?
Savings depend on loan type and tenure. For instance, a ₹50 lakh home loan saves ₹607/month.
Q2. Why did the RBI retain a “neutral” stance?
To balance inflation control and growth support amid uncertain global conditions.
Q3. Will fixed-deposit rates decline?
Yes, banks may lower FD rates as borrowing costs reduce.
Q4. How does this affect the rupee?
The rupee remains vulnerable to global trade wars but is cushioned by RBI’s $630 billion forex reserves.
Conclusion: A Calculated Move for Long-Term Stability
The RBI’s rate cut marks a pivotal shift toward growth revival without compromising inflation targets. Borrowers gain short-term relief, while investors must navigate market volatility. With FY26 inflation projected at 4.2%, further rate cuts could follow if global risks subside.
Disclaimer:
The information provided in this article is for general informational purposes only. While we strive to keep the content accurate and up-to-date, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Any reliance you place on such information is strictly at your own risk. For specific financial advice or decisions, please consult a certified financial advisor or refer to official RBI communications.
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C.K. Gupta
Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.
