RBI Monetary Policy Rate Decision: Governer Sanjay Malhotra Slashed Repo Rate by 0.25%

On February 7, 2025, Reserve Bank of India Governor Sanjay Malhotra announced a 25 basis point rate cut in his inaugural policy meeting as head of the central bank. This marks the first rate reduction after 12 consecutive policy reviews by the Monetary Policy Committee. The repo rate has been lowered from 6.5% to 6.25%.

In addition, both the Standard Deposit Facility and the Marginal Standing Facility have been reduced by 25 basis points each. The MPC also unanimously decided to maintain the policy stance at “neutral.”

India’s financial year 2026 Gross Domestic Product (GDP) growth is seen at 6.7%, Governor Malhotra said, adding that he expects food inflation pressures to see “significant softening.”

Projection for GDP Growth

GDP growth for the first quarter of FY 2026 is projected at 6.7%, with 7% growth in the second quarter, followed by 6.5% in both the third and fourth quarters. On the inflation front, Governor Malhotra forecasts a 4.8% rate for the current financial year and 4.2% for FY 2026. The CPI for the current quarter is expected to be 4.4%. The risks to both growth and inflation are considered to be evenly balanced.

The Governor also commented on the recent depreciation of the currency, emphasizing that the RBI’s exchange rate policy remains consistent. He clarified that the central bank’s interventions in the forex market aim to smooth out volatility, not target a specific rate or band.

Additionally, the RBI has extended two-factor authentication for international digital transactions to offshore merchants.

“MPC noted that inflation has declined, supported by a favourable outlook on food and continued transmission of past monetary policy action. It is expected to further moderate in 2025-26, gradually aligning with the target. The MPC also noted that while growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. This growth-inflation dynamic opens up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target,” Malhotra said.

“Will continue to monitor evolving liquidity & financial market conditions & proactively take appropriate measures to ensure orderly liquidity conditions as required for the system,” the Governor also said, after the liquidity-related announcements last week.

Impact of Cut in Repo Rate

When the RBI lowers the repo rate, all external benchmark lending rates (EBLR) tied to the repo rate will decrease, providing relief to borrowers as their equated monthly installments (EMIs) will reduce.

Lenders may also lower interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR), particularly where the full impact of a 250 bps increase in the repo rate between May 2022 and February 2023 has yet to be reflected.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.