India’s central bank cuts interest rates for first time in nearly five years

NEW DELHI: India’s new central bank governor has reduced interest rates for the first time in nearly five years to stimulate a faltering economy, though the cautious approach has left some investors wanting more decisive action.

In a unanimous decision, all six members of the Reserve Bank of India’s (RBI) monetary policy committee, led by Governor Sanjay Malhotra, agreed to lower the benchmark repurchase rate by 25 basis points to 6.25 percent, which was widely anticipated by economists. However, the committee opted to maintain a ‘neutral’ policy stance instead of switching to an ‘accommodative’ position that might suggest additional rate cuts in the future.

Following the announcement, bond prices fell, as market participants expected more significant immediate liquidity measures to boost the market. Similarly, stocks declined, with the benchmark NSE Nifty 50 index dipping by 0.2 percent. One analyst noted, “While the rate cut aligns with majority market expectations and a neutral stance is sensible amidst ongoing global volatility, the absence of new measures has disappointed investors in the short term. The previous actions taken, although positive, have not been adequate.”

This marks a change for the RBI, which held interest rates steady for two years under former governor Shaktikanta Das due to inflation consistently exceeding the 4 percent target. Malhotra, who joined the central bank in December, maintained a measured approach in his policy address, reaffirming the RBI’s commitment to the inflation target while acknowledging growth risks.

In a televised address from Mumbai, Malhotra stated that the growth-inflation relationship provides the monetary policy committee (MPC) with the flexibility to support economic expansion. He emphasised that the RBI would remain focused on aligning inflation sustainably with the target while also fostering growth.

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The MPC will make policy decisions in future meetings based on the current economic outlook, he added. Although inflation dropped to a four-month low of 5.2 percent in December, it is still above the 4 percent benchmark. At the same time, India’s economic growth has slowed to 6.4 percent, the lowest in four years for the 12 months ending in March 2025. In response, the government announced record tax cuts last week to stimulate consumer spending.

The central bank forecasts growth for the fiscal year starting April 1 at 6.7 percent, which is within the government’s projection range of 6.3-6.8 percent. They anticipate inflation will average 4.2 percent.

Malhotra suggested that inflation may decrease in the coming months but pointed to risks stemming from extreme volatility in global financial markets, uncertainties in international trade policies, and adverse weather conditions. While demand from rural areas is picking up, urban consumption remains weak, a trend reflected in recent earnings reports from major consumer goods companies like Hindustan Unilever and Nestle India.

Reiterating the central bank’s position on currency management, Malhotra stated that foreign exchange interventions aim to mitigate excessive volatility, but the RBI does not target any specific exchange rate or band. He confirmed the central bank’s dedication to ensuring adequate liquidity in the financial system through both short-term and long-term measures.

According to some economists, “The weakening growth and inflation projections have created space for monetary easing. Moving forward, we expect the RBI to closely monitor conditions to ensure that liquidity strategies align with the policy framework.”

Web Desk Karachi