India: Central Bank cuts interest rates for first time since 2020
The RBI sticks to the script: At its meeting on 5–7 February, the Monetary Policy Committee of the Reserve Bank of India (RBI) voted unanimously to lower its policy rate by 25 basis points to 6.25%. The decision matched market expectations and marked the first reduction in interest rates since 2020.
A slowing economy drives the cut: In justifying its decision, the RBI said that the cut would help support economic growth without pushing inflation above its 4.0% medium-run target. The RBI forecasts growth in the fiscal year ending March 2026 (FY 2025) at 6.7%, below that projected for FY 2024. Meanwhile, the Bank projects inflation to fall to 4.2% in FY 2025 from 4.8% in FY 2024, inching closer to target thanks to a favorable monsoon boosting the kharif crop harvest, which includes staples such as rice and millet.
Monetary Policy Committee maintains “neutral stance”: The Monetary Policy Committee also unanimously decided to maintain its monetary policy stance as “neutral”, confounding market expectations that it would shift to an “accommodative” outlook. In post-decision remarks to the press, Governor Sanjay Malhotra stated that the RBI had decided to leave its monetary policy stance unchanged in part because the rupee had depreciated to record lows recently, hit by the threat of U.S. tariffs, making imports pricier. In line with this, U.S. trade policy will be a key factor to watch going forward.
Nonetheless, our Consensus is for the RBI to cut interest rates by a further 50 basis points by the end of FY 2025, as inflation is set to decline close to the 4.0% medium-term target and GDP growth will fall below trend.
The RBI will reconvene on 7–9 April.
Panelist insight: Goldman Sachs analysts commented:
“Going forward, we expect headline inflation ~4.5% yoy in 1H CY25 on the back of easing food inflation, which should allow the RBI to follow up today’s cut with an additional 25bp policy repo rate cut in the April meeting, with risks skewed towards a slightly deeper easing cycle.”