The Reserve Bank of India (RBI) on Friday reduced the repo rate by 25 basis points to 6.25%, marking the first rate cut in five years since May 2020. The repo rate, previously set at 6.5%, is the rate at which the RBI lends to banks.

This decision by the six-member Monetary Policy Committee (MPC) aims to stimulate economic activity by lowering borrowing costs, thereby encouraging spending and investment. The move follows the government's recent personal income tax cuts to boost consumption.

Despite the rate reduction, the MPC maintained a “neutral” stance on the economy. RBI Governor Sanjay Malhotra said that this approach provides the flexibility to adapt to changing macroeconomic conditions.

Malhotra added that the framework has been highly effective for the Indian economy, even during the challenging post-pandemic period. He noted that average inflation has remained lower since the framework's implementation, with the Consumer Price Index (CPI) mostly staying aligned with the target, except for occasional breaches of the upper tolerance limit, Indian Express reports.

The RBI and MPC will leverage the flexibility within the inflation targeting framework to achieve better macroeconomic outcomes while adapting to shifting growth-inflation dynamics. He added that the framework's foundations will be strengthened by incorporating new data, enhancing forecasting of key economic indicators, and developing more robust models.

According to Boman Irani, president of the Confederation of real estate developers' Associations of India: “The RBI's repo rate cut complements recent budget measures designed to boost spending and stimulate economic growth. This monetary policy was imperative, especially after the recent 50-basis-point cut in the Cash Reserve Ratio (CRR), which has already injected significant liquidity into the banking system.

“While the current cut may have a limited direct impact, we anticipate that a further rate reduction in the next MPC meeting will provide stronger impetus to overall demand, accelerating housing sales, particularly in the mid-income and affordable segments.”

Furthermore, the central bank forecasts GDP growth of around 6.7% for the next fiscal year, the RBI governor stated. Meanwhile, the government's Economic Survey, released before the Budget, projected a growth rate of 6.3 to 6.8% for 2025-26, driven by a “strong external account, calibrated fiscal consolidation and stable private consumption.”