In a significant policy shift, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has reduced the repo rate by 25 basis points to 6.25% from 6.5%. This marks the first rate cut in two years and was announced by RBI Governor Sanjay Malhotra on Friday after the MPC’s meeting held between February 5 and 7. The decision was taken unanimously by all members of the committee.
Alongside the repo rate reduction, the standing deposit facility (SDF) rate has been lowered to 6% from 6.25%, while the marginal standing facility (MSF) rate and the bank rate have been revised to 6.5% from 6.75%.
The RBI MPC has opted to continue with its ‘neutral’ stance, emphasizing the need for a sustained alignment of inflation with the target while supporting economic growth. Governor Malhotra highlighted that the committee’s decision was influenced by a decline in inflation, driven by favorable food price outlooks and the ongoing transmission of previous monetary policy measures.
“These growth-inflation dynamics open up policy space for the MPC to support growth while maintaining focus on inflation control. Accordingly, the committee unanimously voted to reduce the policy repo rate,” Malhotra stated.
GDP and Inflation Projections
The central bank has projected India’s GDP growth for the financial year 2025-26 (FY26) at 6.7%. The quarter-wise breakdown is as follows:
- Q1FY26: 6.7% (Revised from 6.9%)
- Q2FY26: 7.0% (Revised from 7.3%)
- Q3FY26: 6.5%
- Q4FY26: 6.5%
On the inflation front, the RBI maintained its CPI-based inflation projection for FY25 at 4.8%, with a slight decrease to 4.4% in the last quarter (Q4FY25). For FY26, inflation is projected at 4.2%, with the following quarter-wise estimates:
- Q1FY26: 4.5% (Revised from 4.6%)
- Q2FY26: 4.0%
- Q3FY26: 3.8%
- Q4FY26: 4.2%
This MPC meeting was the first under the leadership of Sanjay Malhotra, who took over as RBI Governor in mid-December. With a largely restructured six-member committee, analysts had speculated a potential departure from the hawkish stance maintained by former Governor Shaktikanta Das. The latest rate cut aligns with Bloomberg forecasts, which anticipated the new governor’s focus on economic growth over aggressive inflation control.
In its previous Monetary Policy Committee meeting in December 2024, the RBI had kept the repo rate unchanged at 6.5% for the eleventh consecutive time.
Economic Survey 2025 Insights
The Economic Survey 2025, presented by Finance Minister Nirmala Sitharaman, forecasts India’s GDP growth for FY26 in the range of 6.3%-6.8%, consistent with the International Monetary Fund’s (IMF) prediction of 6.5%. The survey attributes the anticipated moderation in economic expansion to weaker manufacturing activity and reduced government spending in FY25. Following an 8.2% growth in the previous fiscal year, GDP growth for FY25 is projected at 6.4%.
Inflation, meanwhile, remained above the 4% target, with retail inflation recorded at 5.22% in December 2024.
Governor Malhotra reiterated the RBI’s commitment to balancing economic efficiency with inflation targeting, stating, “Inflation targeting has served the Indian economy well, keeping average inflation lower since the introduction of the monetary policy framework.”
With the latest policy measures, the RBI aims to support economic growth while ensuring inflation remains within target limits, setting the stage for a calibrated monetary approach in the coming quarters.
Expert Insights:
Kishore Lodha, Chief Financial Officer, UGRO Capital, stated “The much-awaited rate cut has finally arrived, easing interest rate pressure on the industry as a whole and providing relief to home loan borrowers. However, liquidity has turned negative, which remains a cause for concern. The RBI is closely monitoring the situation and implementing measures to mitigate the risk. Inflation has moderated, and the RBI expects it to average 4.2% next year, creating further room for additional rate cuts. Key factors to watch include geopolitical developments, Rabi and Kharif crop yields, GDP growth, and inflation trends.”
Narinder Wadhwa, Managing Director & CEO of SKI Capital Services Ltd mentioned that, “The RBI’s 25 bps rate cut aligns with market expectations, signaling a shift toward a more accommodative stance. The unchanged CRR suggests RBI is focusing on controlled liquidity infusion rather than aggressive easing. The 6.4% GDP growth projection indicates a stable economic outlook. Given the current growth-inflation dynamics, another 25 bps cut could be on the table later this year, in April especially if inflation remains under control and global conditions allow for further easing.”
Suresh Darak, Founder, Bondbazaar, stated, “As expected, RBI has cut the benchmark rate by 25 basis points, while maintaining a neutral stance, aligns with our expectations. The central bank has set an inflation target of 4.8% and we don’t anticipate another rate cut in the next meeting.
The RBI acknowledged the system’s liquidity deficit and committed to providing liquidity as needed. On the currency front, they’ve chosen not to set a specific target, instead focusing on preventing excessive volatility.
Considering these factors, bond market rates appear to have bottomed out, potentially remaining steady or experiencing a slight uptick. However, in the currency market, the rupee still needs to discover its true level amidst the strengthening dollar globally against all major currencies including India.”
Ashwani Dhanawat – ED and Chief Investment Officer, Shriram General Insurance, stated that, The Reserve Bank of India’s decision to cut the repo rate by 25 basis points to 6.25% is a welcome and expected move that aligns with market predictions, providing much-needed support for economic growth. As the government pursues fiscal consolidation, aiming for a fiscal deficit of 4.8% of GDP for the current year and targeting a further reduction to 4.4% in 2025-26, this rate cut reflects a proactive approach to fostering a conducive environment for investment and boosting consumer confidence. Despite ongoing concerns over inflation, particularly with a weakening rupee, this adjustment underscores the RBI’s commitment to balancing growth with fiscal stability. With the economic growth estimate for FY26 now at 6.7%, this strategic decision is likely to enhance the overall economic outlook and promote a sustained recovery in the year ahead.”
Lakshmanan V, Group President & Head – Treasury (treasurer), Federal Bank stated, “The MPC was on reasonably expected lines on all counts – Rate cut, stance and statement on liquidity measures. This decision in my view was a logical extension to the liquidity measures taken in Jan, along with clear assurances given by RBI to support liquidity whenever necessitated going forward. Todays outcome sets the stage for rate cut expectations in April, unless the Inflation and global macro play havoc.”
Rahul Bhuskute – Chief Investment Officer, Bharti AXA Life Insurance stated, “RBI cut repo rates by 25 bps today by a unanimous decision – this was widely expected by the market participants and only a small minority was expecting a pause. However, there is no further liquidity measures announced by the governor and as such, market was overall a bit disappointed and bond yields are up by 4-5 bps post policy.
Inflation in India had been running higher in past few months particularly due to high vegetable prices. RBI was also cautious on spill-over effects of high food inflation on the overall headline inflation and thereby kept the policy rates on pause for a long time, even when global central banks had started cutting. However, now as the vegetable prices have cooled off significantly and the outlook for inflation seems headed towards the Central bank target, RBI has also started its cut cycle with 25 bps cut today.
Former RBI governor Shaktikanta Das in his last policy had mentioned the challenge being faced by MPC was to restore the inflation-growth balance – particularly as inflation was then running high while growth had significantly eased with high frequency indicators suggesting continuing slowdown. Now inflation trajectory looks in a comfortable territory and also growth seems to have picked up a bit with increased government spending. Outlook on growth is also moderately positive with the tax sops announced in the Budget to boost consumption. This improved growth-inflation trade-off has allowed RBI to ease policy rates by 25 bps this time, while maintaining a neutral stance.”
Poonam Tandon, Chief Investment officer, IndiaFirst Life, said that, “The MPC has cut repo rate by 25bps after 5 years. The market had already factored in the rate cut. The 10-year yield is presently at 6.69% (range bound). The liquidity measures which have been undertaken by RBI is a welcome step and the Governor has mentioned that the RBI will continue to support market with liquidity proactively. CPI inflation for the financial year 2025-26 is projected at 4.2% (which is on the lower side) and real GDP growth for the next year is projected at 6.7 % (which looks on the higher side). The risks on both are evenly balanced as per the Governor. The RBI has also decided to introduce forward contracts in Government securities which will be beneficial to insurance companies in their hedging strategy and is a welcome step.”
Binod Kumar, MD & CEO of Indian Bank, stated “The RBI’s decision to deliver the anticipated 25 basis point rate cut is a welcome move, aligning with market expectations. Maintaining a neutral stance is also in line with the expectations. The MPC’s focus on liquidity is a good and heartening thing, reflecting the government and RBI’s concern in this area. Given the government’s initiatives during the budget and the anticipated increase in household expenditure, we foresee optimistic GDP growth.”
Vikas Garg, Head of Fixed Income, Invesco Mutual Fund, stated, “The first MPC meeting under the new Governor delivered a unanimous rate cut of 25 bps after almost five years, in line with market expectations. The commentary on inflation is benign, particularly regarding food prices, with FY26 headline inflation projected to moderate to 4.2%. The outlook for FY26 growth remains upbeat at 6.7%. The stance has been retained as “Neutral,” citing global uncertainty. While there were no major announcements on further liquidity measures, which may disappoint the market slightly, the readiness to proactively provide liquidity is reassuring. There is also more flexibility on currency movement due to market conditions. Overall, this is a well-balanced policy that meets market expectations for the third consecutive time. The new MPC’s more flexible approach to the inflation trajectory under the inflation targeting framework provides room for further rate cuts, even as the MPC remains data dependent. A fiscally prudent budget and the onset of the rate cut cycle set the stage for domestic market yields to come down.”
Rahul Bhuskute, Chief Investment Officer, Bharti AXA Life Insurance stated, “RBI cut repo rates by 25 bps today by a unanimous decision – this was widely expected by the market participants and only a small minority was expecting a pause. However, there is no further liquidity measures announced by the governor and as such, market was overall a bit disappointed and bond yields are up by 4-5 bps post policy.
Global banks cutting rates; RBI focusing on inflation
Inflation in India had been running higher in past few months particularly due to high vegetable prices. RBI was also cautious on spill-over effects of high food inflation on the overall headline inflation and thereby kept the policy rates on pause for a long time, even when global central banks had started cutting. However, now as the vegetable prices have cooled off significantly and the outlook for inflation seems headed towards the Central bank target, RBI has also started its cut cycle with 25 bps cut today.
Key challenges include slower GDP growth, high inflation
Former RBI governor Shaktikanta Das in his last policy had mentioned the challenge being faced by MPC was to restore the inflation-growth balance – particularly as inflation was then running high while growth had significantly eased with high frequency indicators suggesting continuing slowdown. Now inflation trajectory looks in a comfortable territory and also growth seems to have picked up a bit with increased government spending. Outlook on growth is also moderately positive with the tax sops announced in the Budget to boost consumption. This improved growth-inflation trade-off has allowed RBI to ease policy rates by 25 bps this time, while maintaining a neutral stance.”
V. P. Nandakumar, MD & CEO, Manappuram Finance Limited, mentioned that, “The RBI’s 25 basis point cut in the repo rate to 6.25%, after five years marks a pivotal move to boost liquidity in the financial system. With the Standing Deposit Facility now at 6% from 6.25% and the Marginal Standing Facility and Bank rates at 6.50%, this decision is expected to ease borrowing costs and fuel credit demand. It offers a timely boost for sectors such as housing, MSMEs, and consumer finance, positively impacting individuals and business in their growth journeys.”
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