RBI Slashes Repo Rate Amid Global Headwinds

The Reserve Bank of India (RBI) today cut the repo rate by 25 basis points to 6%, marking its second rate reduction since Governor Sanjay Malhotra took office in December.

In another significant development, RBI also shifted its monetary policy stance from ‘neutral’ to ‘accommodative’, signaling a potential tilt toward further easing. In the Indian context, the policy stance indicates the likely direction of future rate moves. This change suggests that, barring unforeseen shocks, the MPC now sees only two options ahead—either maintaining the current rate or cutting it.

Globally, monetary policy stances are typically classified as accommodative, neutral, or tightening:

Accommodative: Aims to stimulate the economy through lower interest rates.
Tightening: Focuses on curbing inflation by raising rates to reduce demand.
Neutral: Offers flexibility, signaling that the economy doesn’t urgently need either stimulus or restraint, and future moves will depend on evolving data.

The move, driven by two key factors, was decided by the Monetary Policy Committee (MPC)—a six-member panel tasked with setting the repo rate in line with the Government’s inflation target.

📊 Inflation Remains Below Target

Consumer price inflation for February 2025 stood at 3.61%, below the RBI’s target of 4%. This decline was largely attributed to a sharp fall in food prices. The central bank also noted a significant improvement in the inflation outlook. According to Trading Economics, the consensus forecast for March 2025 CPI is 3.6%, reinforcing expectations of a sustained period of low inflation.

🌍 Global Headwinds Add to Domestic Caution

The year has begun on an uncertain footing for the global economy. Escalating trade frictions—including new tariff-related measures—have unsettled markets and added fresh layers of risk to the global outlook. This turbulence is evident in key financial indicators:

The US dollar has weakened notably
Bond yields have softened
Equity markets are correcting
Crude oil prices have fallen to a three-year low

In response, central banks across the world are navigating cautiously, with signs of policy divergence emerging as each country prioritizes its domestic macroeconomic conditions.

🇮🇳 Implications for India’s Growth

Against this backdrop, India’s economic recovery continues, albeit gradually, following a muted first half in FY2024–25. However, the challenging external environment continues to pose significant risks. Reflecting on this, the RBI revised its real GDP growth forecast for FY2025–26 from 6.7% to 6.5%, citing global trade-related uncertainty and policy developments as key reasons.

The MPC noted that in an environment of benign inflation and moderate domestic growth, monetary policy must remain supportive of recovery.

📉 How Global Trade Uncertainty Impacts Domestic Growth

The RBI highlighted several ways in which global trade tensions and policy unpredictability could affect India’s economy:

Uncertainty dampens growth by discouraging business investment and household spending.
Global slowdown triggered by trade frictions spills over into weaker domestic demand and output.
Higher tariffs reduce net exports, directly weakening the external sector’s contribution to GDP.

Despite these clear risks, the full extent of the impact remains difficult to quantify due to several “known unknowns,” such as:

The relative impact of specific tariffs
Export-import demand elasticities
Government mitigation efforts, including the proposed Foreign Trade Agreement with the USA

Conclusion

In the face of global uncertainty, weakening external demand, and easing inflation, the RBI’s decision to cut the repo rate and adopt an accommodative stance signals a proactive shift to support domestic growth. With inflation comfortably below target and risks to growth mounting due to global trade tensions, the move allows the central bank to stay ahead of the curve.

But the implications extend beyond macro indicators.

💡 For home loan borrowers, this is welcome news. Since October 2019, most floating-rate retail loans—including home loans—are linked to the repo rate. A 25 bps cut means lower EMIs, easing the financial burden on households and boosting consumption.

💼 For businesses, cheaper credit reduces the cost of borrowing, encouraging fresh investments and expansion—particularly important as firms navigate global headwinds.

📈 For stock markets, lower interest rates often translate to higher valuations and improved investor sentiment, as reduced financing costs enhance corporate profitability. In summary, the MPC’s actions reflect a careful balance between supporting growth and preserving inflation discipline while also providing relief to borrowers and stimulus to broader economic activity.

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