India central bank cuts policy rate for the first time in nearly five years; pegs GDP growth at 6.7%

The Reserve Bank of India has cut its key interest rate for the first time in nearly five years, as cooling inflation has offered room to stimulate the slowing economy.

The Monetary Policy Committee decided to trim the repo rate by 25 basis points to 6.25%, RBI Governor Sanjay Malhotra said in a livestreamed address Friday.

The rate cut was widely expected and marked RBI’s first interest rate cut since May 2020 when the country battled the pandemic-inflicted downturn.

The central bank set the real GDP growth forecast at 6.7% for the fiscal year of 2026 while the inflation rate lower at 4.2%.

The benchmark repo rate has remained steady at 6.5% for the past two years, as domestic inflation rate stayed above the central bank’s medium-term target of 4%.

Following a peak in October, India’s consumer price inflation has eased, dropping within the central bank’s tolerance ceiling of 6%, coming in at 5.22% in December and 5.48% in November.

The Indian government has been steadily lowering its full-year real GDP forecasts, after the economic growth missed expectations by a large margin in the quarter ended September, when its grew by 5.4% — its slowest expansion in nearly two years.

The latest projection last month trimmed the growth estimates for the current fiscal year to 6.4% from 7.2% in October, its worst in four years, while inflation projection was raised to 4.8% versus 4.5% earlier.

With the rupee hitting record lows against the greenback, any cuts to the bank’s policy rate could spark a further rise in domestic inflation, putting further pressure on the currency and likely triggering capital outflows.

RBI has acted to implement substantial interventions in the foreign exchange market to help cushion a potential sudden outflows of foreign capital and avoid any steep fall in the currency.

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