RBI Cuts Repo Rate. Wait For Banks To Pass The Benefit

With this announcement, your loans might become cheaper, so you will have to pay a lower EMI (equated monthly instalment). This is expected to spur demand, which has been slowing in the last few months, denting economic growth. However, it is to be seen how soon retail banks pass the benefit on to customers.

A lower interest rate could boost demand for homes and cars as well. And not just that. The move will also have a direct impact on startups and small businesses, which have been particularly hit by high lending rates.

“But for that, banks would need to pass on the benefit by lowering borrowing rates for the end-customer,” a senior executive of a private sector bank told The Secretariat on condition of anonymity. 

One can expect public sector lenders to announce interest rate cuts earlier that their private sector peers. The interest rate, which has been climbing since then to beat down inflation, has remained at 6.5 per cent for the last two years.

The six-member Monetary Policy Committee (MPC) voted unanimously to cut the repo rate by 25 basis points to 6.25 per cent after having kept it unchanged for 11 straight policy meetings. In the last few meetings, the voting was split among MPC members, reflecting a divergence in views. Even in the last MPC meeting, the voting was 4:2 in favour of maintaining the rate.

The committee, which has three independent members and three from the central bank, noted that though GDP growth is expected to recover, inflation dynamics have opened up space for rate easing, the new RBI Governor Sanjay Malhotra said. This is the last bi-monthly monetary policy of the current financial year.

The MPC has also pegged the inflation rate for the next financial year at 4.2 per cent.

The lowering of the repo rate is expected to reduce banks’ interest rate and boost consumption. The government is aiming to spur consumption to boost economic growth.

The RBI has pegged the growth rate for 2025-26 at about 6.7 per cent. The Economic Survey, presented last week, projected a growth rate between 6.3 per cent and 6.8 per cent.

As per the central bank’s estimates, economic growth rate in the first quarter of 2025-26 will be 6.7 per cent, and for the second quarter 7 per cent. For Q3 and Q4, the RBI expects a growth rate of 6.5 per cent.

“We will be proactive in providing as much liquidity as required. We are always watchful and will be nimble in providing liquidity,” the Governor, said addressing the media. 

Rise In Global Risks

Malhotra, however, said geo-economic uncertainties have risen significantly, posing challenges for emerging economies. The Governor pointed out that though India’s economy continues to be resilient, it is not immune to the rising risks.  

“With the Trump administration in the US shaking up global markets, expect the RBI to be proactive in using liquidity and forex management tools,” D K Joshi, chief economist, CRISIL, said in a statement. He added that the tariff war will have a bearing on policy rate cuts worldwide.

The RBI move, according to analysts, could just be the beginning of a trend, and the central bank may further reduce rates in the new financial year, provided inflation remains in control. The rate cuts in the future will also depend on the moves of the US Federal Reserve and US President Donald Trump's policies.   

The RBI will have the added pressure to remain watchful on the rupee movement. The rupee has fallen to an all time low of 87.5 to a US dollar.