MUMBAI: Borrowing costs, including home loans, are set to decline as the Reserve Bank of India (RBI) on Wednesday cut the repo rate by 25 basis points, reducing it from 6.25% to 6%. The move is part of a broader shift in monetary policy to support growth amid rising global uncertainties caused by escalating trade tensions.
The Monetary Policy Committee (MPC) voted unanimously for the rate cut and also changed the policy stance from ‘neutral’ to ‘accommodative,’ signaling a pro-growth approach. This marks the second consecutive rate cut in 2025, following a similar 25 basis point reduction in February. The RBI reiterated that future decisions will focus on either maintaining or further lowering rates.
Announcing the policy decision, RBI Governor Sanjay Malhotra also revised the central bank’s projections for the 2025–26 fiscal year—lowering the GDP growth forecast by 20 basis points to 6.5%, and the inflation forecast to 4%.
To further ease financial conditions, Malhotra pledged to maintain a surplus liquidity of around 1% of total bank deposits, which translates to approximately ₹2.3 lakh crore—significantly higher than the current surplus of ₹1.5 lakh crore.
Malhotra expressed deeper concern about the impact of global tariffs on economic growth rather than inflation, citing the broader implications of U.S. President Donald Trump’s aggressive trade measures.
“Uncertainty alone dampens growth by discouraging business investment and household spending,” Malhotra said. “Trade frictions will slow global growth, which in turn affects domestic expansion. Higher tariffs will also weigh on net exports.”
He acknowledged the difficulty in fully assessing the fallout, citing “several known unknowns” such as the specific effects of relative tariffs, the elasticity of India’s export and import demand, and the potential outcomes of policy interventions like the proposed India-U.S. trade agreement.
Despite the global headwinds, Malhotra emphasized that inflationary pressures remain contained. He added that India’s relatively low export-to-GDP ratio makes it less vulnerable to trade shocks compared to some other economies.
To stimulate domestic growth, the RBI also announced measures aimed at improving credit flow to smaller borrowers. These include easing access for banks to reach underserved segments and expanding the co-lending model, which allows smaller lenders to collaborate with larger institutions in financing small businesses.
“Global GDP growth forecasts have been downgraded by 20–30 basis points—not just for this year, but also the next. The corresponding cut to India’s growth forecast reflects this trend,” said Malhotra. “While inflation is expected to ease due to slowing demand and declining food prices, our greater concern is growth.”
He hinted at the possibility of additional rate cuts, noting that with inflation staying within target, there is room for further easing. “Going forward, the trend for real interest rates is likely to be downward,” he said.
Malhotra also reminded that the impact of monetary policy adjustments takes time to filter through the economy. “When we raised the repo rate by 250 basis points, it took 6–9 months for lending rates to adjust. The same lag should be expected as we now move in the opposite direction,” he noted.
