India’s central bank, the Reserve Bank of India (RBI), has delivered a significant surprise by cutting its key interest rate by 50 basis points, marking the third consecutive rate cut this year. The repo rate now stands at 5.5%, its lowest level in three years, as the RBI aims to stimulate the economy amid slowing growth and declining inflation.
RBI Governor Sanjay Malhotra explained that economic growth remains “lower than our aspirations,” prompting the central bank to act decisively to encourage domestic consumption and investment in the face of rising global uncertainties. This move follows two earlier cuts in February and April, signaling a clear shift towards supporting economic activity.
India’s economy expanded by 6.5% in the financial year ending March, maintaining its status as the world’s fastest-growing major economy. However, this represents a sharp slowdown from the 9.2% growth recorded the previous year, reflecting the challenges ahead.
On the inflation front, retail price increases slowed to 3.16% in April, the lowest in six years and well below the RBI’s target of 4%. This easing inflation was largely driven by falling food prices, aided by better-than-expected monsoon rains leading to fuller grain stores, weaker global commodity prices particularly oil, of which India is a net importer and a stronger Indian rupee. Consequently, the RBI has revised its inflation forecast downward for the coming year.
Despite the rate cuts, the RBI has shifted its monetary policy stance from “accommodative” to “neutral,” suggesting that future rate adjustments will depend on how the interplay between growth and inflation develops.
Lower borrowing costs are expected to benefit households and businesses alike by improving purchasing power, reducing input costs, and easing government debt servicing. The move is particularly welcome for the struggling real estate sector. Anuj Puri, chairman of ANAROCK Group, highlighted that cheaper home loan EMIs will improve affordability, potentially boosting demand, especially in the affordable and mid-income housing segments that were hit hardest during the pandemic.
Overall, the RBI’s bold decision aims to balance supporting growth while keeping inflation in check, providing a hopeful boost to India’s economic recovery.
