The Reserve Bank of India (RBI) has reduced its key repo rate for the first time in nearly five years, aiming to provide stimulus to the sluggish economy, which is expected to grow at its slowest pace in four years during the current fiscal year.
The Monetary Policy Committee (MPC), consisting of three RBI members and three external members, reduced the repo rate by 25 basis points to 6.25%, following eleven consecutive policy meetings with no changes.
This decision was in line with a Reuters poll, where 70% of economists had predicted a quarter-point reduction. It marked the first reduction in India’s key rate since May 2020.
All six MPC members voted in favor of cutting the repo rate and maintaining the monetary policy stance at “neutral.”
Economic Growth and Inflation Outlook
RBI Governor Sanjay Malhotra, in his first policy review meeting, noted that although growth is expected to recover, it will be much lower than last year, and inflation dynamics have opened the space for rate easing.
India’s government has forecast annual growth of 6.4% for the year ending in March, which is below the lower end of its initial projection, weighed down by a weaker manufacturing sector and slower corporate investments. Growth is expected to range between 6.3% and 6.8% in the next fiscal year. The central bank forecasts growth of 6.7% for next year.
Inflation and Projections for FY 2023-24
Though retail inflation is still above the medium-term target of 4%, it eased to a four-month low of 5.22% in December, and is expected to gradually decline towards the target in the coming months.
The central bank expects food inflation pressures to ease, but volatility in energy prices remains a risk to the inflation outlook.
Impact of Rate Changes and Market Response
After the announcement, India’s benchmark 10-year bond yield rose to 6.69%, while the rupee strengthened to 87.38. Following the decision, the benchmark equity indexes gained 0.2%.
