India cuts rates for first time in 5 years to combat slowing growth

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India’s central bank has cut its benchmark interest rate for the first time in almost five years in an effort to shore up economic growth and reverse a broad downturn in the world’s most populous country.

The decision to cut the headline repo rate by 0.25 percentage points to 6.25 per cent was unanimous and widely anticipated by a consensus of economists.

“We felt the time has come that we can be more supportive of growth, because inflation is coming down,” said Reserve Bank of India governor Sanjay Malhotra, a former revenue secretary who took office in December. He said inflation was expected to continue easing from the 5.2 per cent headline rate in December.

However, he noted that “divergent trajectories of monetary policy across advanced economies, lingering geopolitical tensions and elevated trade and policy uncertainties have exacerbated financial market volatility”.

India is still recording the fastest GDP growth of any major country, but it is grappling with elevated price pressures, stagnant wages, weak consumption and a disappointing set of recent corporate earnings.

GDP growth slowed to 5.4 per cent in the quarter to the end of September, the lowest in nearly two years. The government has forecast growth of 6.4 per cent for the current fiscal year, its weakest rate in four years and down from 8.2 per cent in 2023-24.

The RBI’s move, at the conclusion of its first monetary policy meeting under Malhotra, “signals a shift towards addressing growth concerns while remaining cautious on inflation and external sector risks”, said Suvodeep Rakshit, chief economist at Kotak Institutional Equities.

New Delhi’s decision to appoint Malhotra, rather than give his hawkish predecessor Shaktikanta Das a third term, was seen by many economists as a signal that Prime Minister Narendra Modi would no longer tolerate higher borrowing costs.

India had steadily raised its repo rate, following the coronavirus pandemic, to contain price rises that cut deeply into poor rural and middle-class spending power.

The RBI held the rate at 6.5 per cent for two years under Das, who was criticised by government ministers even as inflation breached the central bank’s target band late last year.

The cut also came despite India’s currency hitting new lows. The rupee has lost about 2 per cent of its value against a strengthening dollar this year, raising concerns about imported inflation.

In a press conference on Friday in Mumbai, Malhotra said the central bank had considered the rupee’s depreciation, but other “global uncertainties”, such as US President Donald Trump’s bellicose trade policies, were “a higher worry”.

Even if Trump rolled back his barrage of tariffs, the threat of trade turmoil could affect growth and investment and spur consumers to delay expenditures, he added.

Economists predicted further rate reductions under a more dovish RBI, even if an uncertain geopolitical environment deterred Malhotra from making deeper cuts.

“While further rate cuts are in the offing, the rate cut cycle could be relatively shallow, especially if global headwinds rise,” said Sakshi Gupta, HDFC Bank’s principal economist, who predicted another cut of 25 basis points in April.

Since Malhotra took the helm, the central bank last month announced an $18bn batch of measures to pump liquidity into India’s banking sector, which many economists saw as an early move by the new governor to pivot towards looser monetary policy.

Modi is also attempting to strengthen domestic consumption, including tax breaks for middle-class households in the budget unveiled last week. Finance minister Nirmala Sitharaman said the move would “leave more money in their hands, boosting household consumption, savings and investment”.