RBI Cuts Repo Rate by 25 Basis Points: Analysis & Outlook

 On Friday, February 7, 2025, the Reserve Bank of India (RBI) announced a 25 basis points reduction in the Repo Rate, bringing it down from 6.5% to 6.25%. This marks the first rate cut since the central bank raised the policy rate by a cumulative 250 basis points between May 2022 and February 2023. The decision reflects RBI’s efforts to balance inflation control with economic growth, amidst evolving domestic and global conditions.

Key Highlights of the Monetary Policy

1. Policy Measures:

   • The Repo Rate has been reduced by 25 basis points to 6.25%.

2. Growth Projections:

   • RBI revised its real GDP growth forecast for FY25 downward to 6.4% from the earlier 6.6%.
   • Growth for FY26 is projected at 6.7%.

3. Inflation Outlook:

   • CPI inflation is projected at 4.8% for FY25, reflecting a gradual moderation.
   • For FY26, inflation is expected to decline further to 4.2%, approaching the RBI’s medium-term target.

4. Policy Stance:

   • RBI has maintained its neutral stance, in place since October 2024, emphasizing inflation management while supporting economic recovery.

Our Analysis & Outlook

• Limited Scope for Aggressive Rate Cuts:
  While the 25 basis points cut signals a shift towards accommodative policy, a deeper rate-cutting cycle may not be imminent. Given global economic uncertainties and domestic inflationary risks, the RBI is likely to proceed cautiously.

• Vulnerability to Global Risks:
  As India runs a current account deficit (CAD), external factors such as capital flows, exchange rate fluctuations, and global monetary policy shifts will influence RBI’s future decisions.

• Inflation Trajectory Hinges on Global Factors:
  A sustained decline in inflation will depend on global commodity prices, particularly energy and food. Any resurgence in crude oil prices or supply chain disruptions could slow the disinflation process.

Conclusion

RBI’s decision to cut rates indicates a strategic shift, but it remains measured in its approach. While the move supports growth, sustained rate cuts will depend on evolving domestic inflation trends, global financial conditions, and fiscal policy measures. Investors and businesses should remain cautious and watch for further policy signals in upcoming reviews.