Outlook for inflation, growth can provide space for only one more rate cut of 25 basis points in near term
New Delhi, February 7, 2025 – In a significant move aimed at boosting economic growth, Reserve Bank of India (RBI) Governor Sanjay Malhotra announced a 25 basis points cut in the repo rate, bringing it down to 6.25%. This is the first rate cut in five years and is expected to have a substantial impact on various sectors, particularly home loans.
The Monetary Policy Committee (MPC) led by Governor Malhotra decided to reduce the policy rate from 6.50% to 6.25%. The decision comes in the wake of the Union Budget 2025, which introduced major income tax changes to boost consumption and economic growth. The repo rate cut is expected to lower monthly EMIs for home loan borrowers, making home loans more affordable and accessible.
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Governor Malhotra emphasized that the primary objective of the RBI remains price stability, but the rate cut is a strategic move to support growth while ensuring financial stability. The RBI also deferred the implementation of the revised liquidity coverage ratio by one year, providing banks with additional time to comply with the new norms.
Key Highlights of the RBI Monetary Policy 2025:
- Repo Rate Reduction: The Monetary Policy Committee (MPC) unanimously decided to lower the repo rate by 25 basis points to 6.25%, signaling a shift towards a more accommodative monetary policy stance.
- Inflation Outlook: Despite the rate cut, the RBI remains vigilant about inflation. Recent data indicates a decline in inflationary pressures, with the Consumer Price Index (CPI) easing to a four-month low. The central bank anticipates further softening of inflation in the coming months, provided there are no unexpected supply shocks.
- Economic Growth Projections: The government has revised its GDP growth forecast to 6.4% for the fiscal year ending in March, down from an earlier projection of 8.2%. The RBI’s rate cut is intended to bolster economic activity and support this growth trajectory.
Impact on Home Loans
The reduction in the repo rate is anticipated to make home loans more affordable for borrowers. A lower repo rate typically leads to decreased lending rates, resulting in reduced Equated Monthly Installments (EMIs) for both existing and prospective homeowners. This move is expected to boost the housing market by making financing more accessible.
Industry Reactions
Industry leaders have welcomed the rate cut, viewing it as a positive step toward revitalizing various sectors. The automotive industry, for instance, anticipates a surge in vehicle sales due to lower loan rates. Similarly, the real estate sector expects increased activity as home loans become more affordable.
Banking Sector Insights
Despite the rate cut, some bankers express concerns over persistent tight liquidity conditions, which may hinder the immediate transmission of rate reductions to consumers. The banking system has been experiencing a liquidity deficit since mid-December 2024, which could delay the benefits of the rate cut reaching borrowers.
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