The Reserve Bank of India (RBI) under new governor Sanjay Malhotra on Thursday cut interest rates for the first time in five years in a policy maneuver aimed at supporting growth.

All six members of the RBI’s rate-setting monetary policy committee (MPC), in their first meeting this year, voted unanimously to cut the key repurchase rate by 25 basis points to 6.25%. One basis point is one-hundredth of a percentage point.

The MPC also decided to continue to stick with its “neutral” monetary policy stance and remain focused on meeting its inflation target.

Former RBI governor Shaktikanta Das, who demitted office in December, had maintained a status quo on interest rates for two years as inflation hovered above the 4% goal.

In December, retail inflation eased to a four-month low of 5.2%. But the government’s first advance estimates showed India’s economic growth slowing to a four-year low of 6.4% in fiscal 2025.

On the back of bleak growth projections, the government in its budget presented last week pared taxes and eased income tax slabs in an effort to boost consumption.

The monetary policy easing comes on the back of the relaxation in taxes, with the coordinated fiscal and monetary actions likely to spur growth, according to analysts.

In his policy speech on Friday, Malhotra, who was earlier the finance secretary before moving to helm the central bank in December, reaffirmed RBI’s mandate to bring inflation under control while being mindful of growth risks.

The growth-inflation dynamics “opens up policy space for the MPC to support growth,” Malhotra said in Mumbai.

RBI will “remain unambiguously focused on a durable alignment of inflation with the target while supporting growth,” he added.

Meeting the press after delivering the monetary policy statement, Malhotra said RBI’s inflation target focus will consistently be on the 4% midpoint of the target range of 2-6%.

Inflation is expected to moderate in the coming months, Malhotra said, while pointing to risks from excessive volatility in the global financial markets, uncertainty in global trade policies and adverse weather events.

RBI also projected growth in the next fiscal year beginning 1 April at 6.7%, the higher end of the government’s target range of 6.3%-6.8%, while inflation will likely average 4.2%, he said.

Meanwhile, the lack of any fresh liquidity-boosting measures in the policy statement led to a decline in both stocks and bonds, despite the rate cut.

RBI said it would “remain nimble” on providing liquidity, while offering banks more time to comply with a new liquidity coverage ratio (LCR).

Benchmark indices the Sensex and the Nifty on Friday declined 0.25% and 0.18%, respectively, from the previous day’s close.

ExpertSpeak

“RBI’s decision to ease the policy rate is a timely and forward-looking step and we hope that the banking sector would follow through,” Harsha Vardhan Agarwal, president of the Federation of Indian Chambers of Commerce and Industry (Ficci), said. “RBI has maintained a neutral stance…the indication towards a more flexible interpretation of inflation targeting sets the stage for further rate cuts over the near term.”

“The decision to lower the policy rate comes amid moderating growth momentum, increasing challenges from external factors, and a slowdown in inflationary pressures,” Rajani Sinha, chief economist at Care Edge, said on the broader economic context of the rate cut. “The decision to retain neutral stance will allow RBI to adjust its policy according to evolving macroeconomic conditions amid heightened uncertainty, especially from the external sector.”

Sinha projected a gross domestic product (GDP) growth rate of 6.7% for the upcoming year, aligning with other forecasts, and anticipated a lower inflation rate of 4.2% for FY26, below their projections of 4.5%.

Explaining RBI’s strategy to support the money market, Sinha said: “We expect RBI to continue upholding favorable money market conditions by elongating tenor and higher quantum of repo auctions, currency swaps, and OMO (open market operation) purchases. These liquidity measures should ensure a smoother transmission of rate cuts in the money market.”

“This will also prepare the ground for rate cuts in the future. A further rate cut of 25-50 bps is expected in FY26, depending on how growth-inflation dynamics play out. Global factors and their implications for the domestic economy will be critical for the RBI in FY26,” Sinha added.

RBI’s decision to reduce the repo rates by 25 bps piggybacks on the recent taxation benefits announced in the budget. It is undeniably a major boost to the homebuyers, particularly for affordable housing buyers,” Anuj Puri, chairman of ANAROCK Group, said.

“Many potential first-time homebuyers hesitating to take the plunge may make their move now as rates will reduce – as long as banks pass on the key benefits to buyers,” Puri said.

“The rate cut may be less effective by rising property prices if inflation remains as high as it is now. It remains to be seen if banks pass on the full benefit in a timely and seamless manner,” he added.

“Liquidity has turned negative, which remains a cause for concern. RBI is closely monitoring the situation and implementing measures to mitigate the risk,” Kishore Lodha, chief financial officer of UGRO Capital, said.

“Inflation has moderated, and the RBI expects it to average 4.2% next year, creating further room for additional rate cuts,” Lodha added.