On February 7, 2025, the Reserve Bank of India (RBI) reduced the policy repo rate by 25 basis points, bringing it down from 6.5% to 6.25%. This marks the first rate cut in nearly five years, aiming to stimulate the slowing economy.
Key Highlights:
Reasoning Behind the Rate Cut: The decision was influenced by a decline in inflation rates, providing the RBI with the flexibility to support economic growth. Governor Sanjay Malhotra noted that inflation is expected to continue its downward trend from the 5.2% recorded in December.
Economic Context: India's GDP growth has decelerated to 5.4%, with projections indicating a 6.4% growth rate for the current fiscal year—the slowest in four years. Challenges such as high inflation, stagnant wages, and weak consumption have contributed to this slowdown.
Market Reactions: Following the rate cut, sectors sensitive to interest rates experienced gains. The Nifty 50 index rose by 0.35%, and the BSE Sensex increased by 0.28%. Financials, auto, real estate, and metals sectors all saw positive movements.
Bond Market Activity: In response to the rate cut, Indian state-run companies, including REC, IIFCL, HUDCO, and SIDBI, plan to raise nearly $2 billion through bond sales early next week. Despite the rate reduction, bond yields have risen due to the absence of additional liquidity measures from the RBI.
This rate cut signifies a shift in the RBI's monetary policy approach, balancing the need to control inflation with measures to bolster economic growth.
