Its been a historic RBI Policy meet for sure. The Reserve Bank of India has finally come out of its 5-year hiatus and cut key Policy repo rate by 25 bps to 6.25% from 6.50%. This is the first time that the RBI cut rates after 2020. The last rate cut by the Reserve Bank of India was in May, 2020 when it had slashed rates by 40 bps. The Reserve Bank of India also tweaked the GDP and inflation targets for the coming financial year.
RBI cuts Repo rate by 0.25 bps to 6.25%
The Reserve Bank of India has cut Policy repo rates by 25 bps to 6.25%. The CRR rate is currently unchanged at 4%. In rate action is inline with market expectation and RBI highlighted that it is a necessary step to support growth. Deepak Agrawal, CIO- Debt, Kotak Mahindra AMC explained that “RBI MPC decided to cut the policy rates by 25 bps in line with market expectations, while keeping stance at neutral. RBI has guided to ensure sufficient durable liquidity in the system and will take pro-active measures for the same. Rate cut along with assurance on liquidity should help in boosting the consumption and revive growth. We continue to expect incremental 25 bps rate cut till June 2025.”
FY26 GDP growth seen at 6.7%
The RBI is, no doubt, walking the tight rope in terms of balancing growth and inflation. The RBI Governor Sanjay Malhotra said, “volatility in global financial markets and continued uncertainties about global trade policies coupled with adverse weather events pose risks to the growth and inflation outlook. This calls for the MPC to remain watchful.” Highlighting the need for maintaining the “right balance”, the RBI Governor said that they expect FY26 GDP growth to be 6.7% driven by consumption and investment in the backdrop of challenging global economic uncertainties. The growth outlook for the various quarters is as follows-
-Q1FY26 GDP is seen at 6.7%
-Q2FY26 GDP is seen at 7%
-Q3FY26 GDP seen at 6.5%
-Q4FY26 GDP seen at 6.5%
The overall GDP outlook for FY25 is seen lower than earlier targets at 6.4%. According to RBI, growth will be driven by strong household consumption, improved investment cycle and higher capacity utilisation.
FY26 inflation likely to be 4.2%
Though headline inflation has shown signs of decline from the significantly elevated levels of 6.2% in October, RBI expects FY25 inflation to be 4.8%. The target for FY26 is set slightly lower at 4.2%. According to RBI’s estimates, Inflation is likely to trend below 4% by Q3 of FY26. Softening food prices, moderate core inflation levels are helping rein in inflation. However, climate risks and global financial volatility continue to be concerns for the Reserve Bank.