The Reserve Bank of India (RBI) has announced a 25 basis point reduction in the key repo rate.
The month of April, 2025 has brought cheers for individual tax payers, home buyers or loan takers first with new tax regime (nil income tax for income up to Rs 12 lakh [$13,946] annually as announced in the Union Budget 2025-26) coming into effect this month and now announcement of key rate cut by the Reserve Bank of India by 25 basis points. These two decisions will help additional savings in hands of individuals which may result in more spending and thus increase in economic activity and economic growth.
The RBI’s decision to cut the repo rate (a rate at which RBI lends to banks) by 25 basis points to 6 per cent from 6.25 per cent and also adopting or changing its stance to “accommodative” from “neutral” signalling the intended direction of policy rates going forward. Accordingly, with respect to the policy rate, which is the mandate of the Monetary Policy Committee (MPC), the change in stance from ‘neutral’ to ‘accommodative’ means that going forward, in absence of shocks, the MPC is considering only two options – status quo or a rate cut. In other words, there will be no rate hike in the near future. This change in stance has been hailed by the industry across the board saying this is central bank’s commitment to supporting growth while ensuring financial stability. The industry is looking forward to swift and effective transmission of rate cut by the banks in the form of lowering lending rates. Few PSU lenders and private banks have already announced cut in their lending rates passing the benefit of lower rates to its customers.
RBI’s decision to cut the rates for the second time in 2025 was not an easy decision especially in the backdrop of a challenging global environment. The global economic outlook is fast changing. The recent trade tariff related measures have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation. Amidst this turbulence, the US dollar has weakened appreciably; bond yields have softened significantly; equity markets are correcting; and crude oil prices have fallen to their lowest in over three years. Under these circumstances, central banks are navigating cautiously, with signs of policy divergence across jurisdictions, reflecting their own domestic priorities, the RBI Governor, Sanjay Malhotra had said while announcing the first bi-monthly monetary policy of current financial year.
“The difficulty to extract signal from a noisy and uncertain environment poses challenges for policy making. Nevertheless, monetary policy can play a vital anchoring role in ensuring that the economy remains on an even keel,” he had said.
According to RBI, the Indian economy has made steady progress towards the goals of price stability and sustained growth in the recent months. On the inflation front, while the sharper-than-expected decline in food inflation has given the Central Bank comfort and confidence, even as it has cautioned to remain vigilant to the possible risks from global uncertainties and weather disturbances. Growth is improving after a weak performance in the first half of the financial year 2024-25.
The RBI has project real GDP growth for 2025-26 at 6.5 per cent, with Q1 at 6.5 per cent; Q2 at 6.7 per cent; Q3 at 6.6 per cent; and Q4 at 6.3 per cent. It has lowered the project GDP by 20 basis points as earlier projection was 6.7 per cent GDP growth for the year 2025-26. This is mainly due to the impact of imposition of “Reciprocal Tariffs” by the US.
Exact impact of these tariffs is yet to be quantified as there are several known unknowns. But decisions like policy rates and government of India’s proposed Foreign Trade Agreement with the USA may help in impeding the adverse impact of such tariff policies of the USA.
