RBI Cuts Repo Rate to 6.25%

The Reserve Bank of India’s new governor, Mr. Sanjay Malhotra, announced a 25 basis point reduction in the repo rate, lowering it to 6.25%, intending to facilitate a slowing economy. The Monetary Policy Committee’s (MPC) decision set back some investors seeking more proactive measures. Although inflation rates declined, the growth rate slowed, with projections of a 6.7% GDP increase. RBI’s new governor, Malhotra, focused on long-term price stability and growth support.

Interest rates were cut for the first time in nearly five years to stimulate economic growth, offering a balanced approach that disappointed a few investors looking for more forward-thinking steps. The governor said the standing deposit facility (SDF) rate has also been adjusted to 6% from 6.25%. In comparison, the marginal standing facility (MSF) and bank rates have been adjusted to 6.5% from 6.75%.

Rate Cuts, Liquidity, and Inflation: What Lies Ahead?

This proactive monetary policy was pivotal, especially after the latest 50-basis-point reduction in the Cash Reserve Ratio (CRR), which has already brought considerable liquidity into the banking system. However, as inflation remains slightly above the medium-term target of 4%, the central bank has a tough road ahead. The banking system must inject liquidity and cut repo rates in the coming quarter to keep inflation in check.

The committee also voted to keep the policy stance as “neutral” instead of changing it to “accommodative,” indicating further rate reductions to come. Bonds declined despite the rate cut, with some investors saying Malhotra could not provide any immediate liquidity steps to stimulate market growth. Additionally, stocks also fell, with the benchmark NSE Nifty 50 index trading 0.2% lower.

The rate decision comes soon after the government dropped personal tax rates in Budget 2025 to increase spending and promote growth. However, if inflation persists, the rate cut may be less efficient due to rising property prices. Also, it remains to be seen if banks will efficiently and effortlessly pass on the complete benefit to borrowers.

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Homeownership Gets a Boost with RBI’s Rate Reduction

The repo rate cut will boost liquidity and increase consumption and purchasing power, fostering economic growth and development.  The interest rates on most bank loans, including car, home, and MSE loans, are related to an external benchmark-linked rate (EBLR). As borrowing costs drop, the real estate market will grow significantly, making homes more affordable. 

Next MPC Meeting Could Bring More Monetary Relief

The Reserve Bank of India’s decision to reduce the repo rate to 6.25% adds to recent budget announcements to increase consumption and drive economic development. Although the present cut may have a limited scope for direct change, an additional rate cut in the next MPC meeting will significantly boost overall demand, accelerating housing sales, mainly in the mid-income and affordable segments. 

These measures, taken together, indicate a solid framework for sustainable growth, enhancing confidence among homebuyers, developers, and investors.

Considering the existing growth-inflation dynamics and its neutral stance, the MPC felt that a less restrictive monetary policy is more suitable at the current juncture. Further, analysts will carefully track the consequences of policy change in the upcoming months and evaluate its impact on boosting economic growth while keeping inflation in check.