The news long-awaited at last broke through! In a significant development, the Reserve Bank of India (RBI) lowered the repo rate 25 basis points (bps) to 6.25%. It is a first rate cut in nearly five years, with the last one in March 2020 when the rate was lowered 75 basis points to 4.40%.
The RBI Governor Sanjay Malhotra announced this after a three-day Monetary Policy Committee (MPC) meeting from February 5 to February 7, 2025. Governor Malhotra said, "The Monetary Policy Committee unanimously voted to cut the policy rate by 25 basis points from 6.5% to 6.25%." In addition to this, the standing deposit facility (SDF) rate has been set at 6.00%, and the marginal standing facility (MSF) rate and the Bank Rate have been set at 6.50%.
A Look Back at History of RBI’s Repo Rate
The repo rate experienced a number of fluctuations over the years, a reflection of the RBI’s balancing act between inflation and economic growth. The current cut is a critical one, particularly following a long period of stability. It reflects the central bank’s intention to boost economic activity and maintain inflation under control.
What Does This Rate Cut Do?
For the economy
The primary motive for reducing the rate is to boost growth in the economy. By reducing lending costs, the RBI aims to boost consumption and investment, both of which are critical for reviving growth. The central bank is also working towards its medium-term target of maintaining Consumer Price Index (CPI) inflation at 4%, with a tolerance margin of ±2%.
The RBI is optimistic about the economy, naming a strong rabi crop and a revival in industrial activity as two major drivers of 2025-26 growth. Investment by business and exports of services will also play a positive role, they say. However, factors like global curbs on trade and a rise in commodity prices can endanger such a growth trajectory.
Considering these factors, the RBI has estimated real GDP growth in 2025-26 at 6.7%, with quarterly projections as under:
- Q1: 6.7
- Q2: 7.0
- Q3 and Q4: 6.5 both
For Inflation
The interest rate cut will have a mixed effect on inflation. On one hand, lower lending rates can increase demand, pushing price inflation. On the other hand, a good Kharif output, benign winter vegetable prices, and a bumper rabi output will reduce food inflation.
However, global uncertainty, such as uncertain price fluctuations in energy and financial market unpredictability, can have an inflationary impact. For 2025-26, for 2025-26, the RBI has predicted CPI inflation at 4.2%, with quarterly estimates:
- Q1: 4.5
- Q2: 4.0%
- Q3: 3.8 - Q4: 4.2
For Loans
One of the most common queries is: How will loans be affected by this rate cut? Will interest fall? And the answer is, yes, but with qualifications. Cutting the repo reduces the price at which banks can borrow from the RBI, and that will, in general, mean a fall in lending rates for buyers. But how much of a benefit will depend on how soon and how effectively banks pass through the rate cut to lenders.
For those with floating-rate loans, it can result in lesser EMIs. Decline in interest rates will most likely encourage people to opt for loans for high-value items like cars and housing. With recently announced Union Budget of no income tax for incomes below ₹12 lakh, such a rate cut will surely make life easier for the middle-class populace.
For Mutual Funds
The impact will vary with fund categories. Long-term debt funds will benefit, with a rise in price of bonds when a drop in interest rates occurs, but short-term debt funds can hurt with lowered short-term yields. Equity funds can benefit positively with lowered borrowing costs, and a drop in interest rates can boost corporate earnings and performance in stocks.
For Fixed Deposits (FDs)
While borrowers will rejoice, FD investors will not have a cause for happiness similar to them. Rate cuts have a uniform effect of lowering savings instruments and fixed deposit interest rates. What this can mean for FD investors is a drop in returns, and alternative investments will have to be contemplated then.
The Road Ahead The RBI’s decision to cut down the repo rate is a bold one with an intention to rekindle growth in the economy and keep inflation in a healthy position. Experts will monitor in future months to assess its success. For now, the rate cut carries both opportunity and challenge for both borrower and investor alike. Borrowers will have access to lowered interest, but investors will have to re-strategise in a bid to adapt to the new financial environment. Disclaimer: This information is for educational use and not for use in investing in actual investments/securities. In sum, the move by the RBI reflects the central bank’s determination to square growth with dealing with both global and domestic sensitivities. As its impact unfolds, it will have to be seen how it shapes India’s direction in the months to follow.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It does not constitute legal, financial, or professional advice.
