New Delhi: The Monetary Policy Committee of the Reserve Bank of India reduced the repo rate by 25 basis points on Friday, bringing it down from 6.5% to 6.25%. In five years, this was the central bank's first rate cut.
The Reserve Bank announced its most recent rate drop in May 2020, cutting rates by 40 basis points to offset the negative economic effects of the COVID-19 pandemic.
The interest rate at which the central bank loans money to commercial banks is known as the repo rate. Changes to it are decided every two months by the Monetary Policy Committee.
One-hundredth of a percentage point is called a basis point. The percentage change in a financial instrument's value is referred to as a basis point.
In order to promote economic growth by lowering the cost of borrowing for both individuals and corporations, central banks typically lower repo rates. For borrowers, this means reduced equated monthly instalments, or EMIs.
At its 53rd meeting, which took place from Wednesday to Friday, the Monetary Policy Committee unanimously decided to lower the repo rates. The committee also agreed to stick with a neutral monetary policy approach, focusing on aligning inflation targets while supporting growth, Scroll.in reported.
“These decisions are in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4% within a band of +/- 2%, while supporting growth,” the RBI stated in a press release.
A neutral stance indicates that the Reserve Bank maintained flexibility in adjusting policy rates in response to current economic conditions.
The Reserve Bank of India is entrusted with regulating inflation at 4%, with a tolerance band of 2% to 6%. In October, the inflation rate crossed the tolerance limit of 6% for the first time since August 2023.
“The interest of the economy demands financial stability and consumer protection, and our mandate at the RBI is to ensure both of them,” said Sanjay Malhotra, the governor of the central bank.
He added: “We recognise that just like there are no free lunches, that regulations for enhancing financial stability and customer protection also come with costs.”
The RBI governor also remarked that, while the Indian economy is robust and resilient, it has been under strain, with the rupee affected by global difficulties.
The Indian rupee fell to an all-time low of 87.58 per dollar on Thursday. The depreciation was mostly caused by the exit of foreign investors from India.
Regarding real GDP, Malhotra stated that the Reserve Bank estimates a 6.7% growth rate in the coming fiscal year, with balanced risks. On December 30, the Reserve Bank stated that India's economy is displaying resilience and stability, with GDP growth projected at 6.6% in 2024-25.