Reserve Bank of India cuts benchmark rate for the first time in nearly five years
- The Reserve Bank of India reduced its benchmark repo rate to 6.25%, the first cut since May 2020.
- This decision was influenced by softer inflation and the need to stimulate economic growth amid declining GDP forecasts.
- The rate cut marks a significant shift in the RBI's monetary policy approach, suggesting a new accommodative stance moving forward.
In India, the Reserve Bank of India (RBI) has made a significant monetary policy shift by cutting its benchmark repo rate by 25 basis points to 6.25%, marking the first reduction in nearly five years. This decision comes in response to the slowing economy, which faced challenges due to inflation and external factors, including geopolitical tensions and market volatility. Following the pandemic, the RBI had maintained a stable rate at 6.5% since May 2020, but recent softer inflation readings have prompted the central bank to take a more accommodative stance under the new Governor Sanjay Malhotra. The Indian economy struggled, growing only 5.4% in the quarter ended September, the slowest in nearly two years, leading the government to adjust economic growth forecasts downward. The increase in inflation, which breached the RBI's target in previous months, has given way to relief as inflation figures began to ease, paving the way for a potential rate cut. Investors anticipated this decision as bond markets responded positively, with a decline in yields. With the rupee facing pressure and hitting record lows against the dollar, the RBI's decision highlights its balancing act between stimulating growth while managing currency volatility. Capital outflows remain a concern as lower interest rates may lead to further depreciation of the rupee, influencing domestic inflation. Financial analysts indicated that despite the risks, the upcoming monetary policy adjustments could provide needed support to stimulate economic growth, especially amidst an uncertain global market period. As financial markets reacted cautiously to the news, Indian stock indexes experienced mixed trading sessions. The RBI's decision not only signifies an important turning point in India's economic management but reiterated the need for proactive strategies to navigate potential external upheavals, especially with the continued watch on President Donald Trump's policies regarding trade, which could alter India's significant surplus with the U.S. The RBI aims to strike a balance that supports both domestic economic growth and financial stability.