The Reserve Bank of India’s (RBI) decision to cut the repo rate by 25 basis points to 6.25 per cent marks a turning point in the country’s monetary policy after nearly five years of a steady stance. With economic growth projected to slow to 6.4 per cent in the current fiscal year, the rate cut signals an attempt to inject fresh momentum into the economy. However, given persistent inflationary pressures and global uncertainties, the central bank’s move is both timely and measured.

The decision to ease rates follows concerns over sluggish economic growth, particularly in manufacturing and corporate investment. The central bank’s own projections indicate only a modest recovery, with growth expected at 6.7 per cent next year. Yet, inflation remains a challenge. While retail inflation dipped to 5.22 per cent in December, it remains well above the RBI’s medium-term target of 4 per cent. The new RBI Governor, Sanjay Malhotra, expressed confidence that inflation will gradually ease, with food inflation pressures expected to subside and overall price levels declining to an average of 4.2 per cent next year. However, the risk of energy price volatility remains a concern, which could disrupt this trajectory. The unanimous vote by all six members of the Monetary Policy Committee (MPC) to cut rates and maintain a ‘neutral’ stance indicates a broad consensus within the RBI on the need for easing.

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However, this also suggests that the central bank is not committing to a prolonged rate-cutting cycle just yet, keeping room for flexibility in response to future inflation and growth trends. A lower repo rate reduces borrowing costs, potentially encouraging businesses to invest and expand. However, for monetary easing to translate into tangible economic benefits, credit transmission needs to be effective. Indian banks, still dealing with bad loans and risk-averse lending practices, may not fully pass on the benefits to businesses and consumers. The impact of a 25 basis point cut is incremental rather than transformational. Businesses looking for major capital investments may require further easing or fiscal incentives. The government’s recent tax cuts and expectations of strong agricultural output could complement the rate cut, but sustained investment growth will depend on broader confidence in the economy.

Financial markets responded cautiously, with bond yields inching up and equities posting modest gains. The rupee’s slight appreciation suggests investors were not entirely surprised by the move. The key question now is whether this cut is the beginning of a deeper easing cycle or a one-off adjustment. The RBI’s growth forecast of 6.7 per cent next year is optimistic but realistic, provided external shocks remain limited. However, the central bank has kept its options open. If inflation remains above 5 per cent for longer than expected, further rate cuts may be off the table. For now, the rate cut is a welcome step, but its success depends on how effectively it revives investment sentiment. With global headwinds and domestic uncertainties still in play, the cautious approach is understandable.