India central bank cuts interest rates to rev up slowing economy

MUMBAI (ICIS)–India’s central bank on Friday reduced its benchmark interest rate for the first time in nearly five years, to address slowing economic growth amid heightened global geopolitical uncertainty and continued weakness in the Indian rupee (Rs).

• Benchmark interest rate cut by 25 basis points to 6.25%
• Monetary policy stance kept at “neutral”
• Year-to-March ’26 GDP growth forecast at 6.7%; inflation at 4.2%

In its monetary policy decision, the Reserve Bank of India (RBI) cut its policy interest rates to 6.25% from 6.50% previously and retained its monetary policy stance at “neutral”.

Meanwhile, it has maintained the repurchase (repo) rate at 6.50% since February 2023. The last time it reduced this repo rate was in May 2020.

India is a giant emerging market in Asia, whose economy ranks among the fastest growing in the world in recent years. The country is also a major importer of petrochemicals.

RBI’s monetary policy meeting, the first under its new governor Sanjay Malhotra, was conducted days after India’s budget for the fiscal year 2025-26 was presented to parliament, in which the government cut personal income tax in a bid to boost consumption and growth.

“While inflation has declined and is expected to further moderate in the next financial year, and economic growth is expected to recover, it is still much lower than the last fiscal. This has opened up the space for easing the repo rate,” Malhotra said.

Malhotra assumed the RBI governor post in December 2024.

While the central bank remains optimistic about India’s growth outlook, following a good monsoon season and an anticipated revival of capital expenditure, global factors could slow down growth, he said.

“The world economic landscape remains challenging with slower pace of disinflation, lingering geopolitical tensions and policy uncertainties,” the RBI said in its official statement.

“The strong [US] dollar also continues to strain emerging market currencies and enhance volatility in financial markets,” it added.

At 08:30 GMT, the Indian rupee was trading at Rs87.40 to the US dollar.

It plunged to an all-time low of Rs87.58 against the US dollar on 6 February.

RBI has projected India’s GDP growth rate for the next fiscal year ending March 2026 at 6.7% – near the high end of the finance ministry’s growth forecast of 6.3% to 6.8%.

In fiscal Q2 (July-September 2024), the south Asian country’s actual GDP growth slowed to 5.4%, the weakest in almost two years due to sluggish manufacturing growth and weak consumption. It was also significantly lower than the RBI’s projection of a 7% growth for the quarter.

The government will release its third quarter GDP data on 28 February.

RBI GDP Forecasts	FY 2025-26
April-June (Q1)	6.7%
July-September (Q2)	7.0%
October-December (Q3)	6.5%
January-March (Q4)	6.5%

Meanwhile, inflation forecast for the current fiscal year has been retained at 4.8%, with fiscal Q4 (January-March 2025) inflation revised down to 4.4% from 4.5% previously on easing food inflation.

The RBI has projected retail inflation to be at around 4.2% in the next fiscal year.

“Headline inflation after moving above the upper tolerance band in October, has since registered a sequential moderation in November and December,” Malhotra said.

While food inflation is expected to soften further over the next few quarters, core inflation is expected to rise but remain moderate, he added.

However, rising uncertainties in global financial markets, coupled with continuing volatility in the global energy prices and adverse weather events could present upside risks to the RBI’s inflation projections, the RBI said.

In December, consumer inflation eased to a four-month low of 5.22% on easing food prices

RBI inflation forecasts	FY 2025-26
April-June (Q1)	4.5%
July-September (Q2)	4.0%
October-December (Q3)	3.8%
January-March (Q4)	4.2%

Focus article by Priya Jestin