RBI Monetary Policy: Governor Sanjay Malhotra delivers 25 bps rate cut for first time in 5 years; 5 key takeaways

RBI Monetary Policy: In line with market expectations, the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) decided to cut the repo rate by 25 bps for the first time in nearly five years and keep the monetary stance “neutral.” The standing deposit facility (SDF) rate shall be 6 per cent, and the marginal standing facility (MSF) rate, and the Bank Rate shall be 6.50 per cent.

RBI Governor Sanjay Malhotra announced the policy decision, citing inflation was aligning with the target. The MPC unanimously decided to cut rates and maintain the stance.

“The MPC decided unanimously to reduce the policy repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. The MPC also decided unanimously to continue with the neutral stance and remain unambiguously focussed on a durable alignment of inflation with the target, while supporting growth,” the RBI Governor said.

After keeping the benchmark repo rate unchanged at 6.5 per cent for the eleventh consecutive meeting, India’s central bank cut rates in its February 2025 meeting amid growing concerns about economic growth losing momentum and emerging signs of inflation approaching its 4 per cent target. 

RBI cut benchmark rates for the first time in nearly five years. It had last reduced the repo rate by 40 basis points to 4 per cent in May 2020.

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RBI Policy: Key takeaways

Let’s take a look at five key takeaways from the RBI’s February policy decision:

1. RBI bites the bullet, starts cutting rates

Amid heightened global uncertainty, the central bank’s monetary policy committee unanimously decided to cut benchmark policy rates by 25 bps to 6.25 per cent from 6.50 per cent. 

The move was in sync with market expectations, as after the Budget 2025, expectations were high that the RBI would also take measures to address the challenge of economic growth losing steam.

2. Growth largely stable but needs focus

Economic indicators appear to have dominated the minds of MPC members. While the central bank expects the real GDP growth for the next fiscal year (FY26) at 6.7 per cent, it highlighted the concerns due to global factors. 

The RBI projected real GDP growth for the current year at 6.4 per cent, down from 6.6 per cent projected in the last policy meeting in December.

Real GDP growth for 2025-26 is projected at 6.7 per cent, with Q1 at 6.7 per cent (against 6.9 per cent projected earlier), Q2 at 7 per cent (from 7.3 per cent projected earlier), and Q3 and Q4 at 6.5 per cent each.

“Global headwinds continue to impart uncertainty to the outlook and pose downward risks,” said Malhotra.

3. Inflation receding

The RBI expects inflation to come down gradually near its target range of 4 per cent.

CPI inflation for 2024-25 is projected at 4.8 per cent, with Q4 at 4.4 per cent. Assuming a normal monsoon next year, RBI expects CPI inflation for 2025-26 at 4.2 per cent with Q1 at 4.5 per cent, Q2 at 4 per cent, Q3 at 3.8 per cent, and Q4 at 4.2 per cent.

“Headline inflation, after moving above the upper tolerance band in October, has since registered a sequential moderation in November and December. Food inflation pressures, absent any supply-side shocks, should see a significant softening due to good Kharif production, winter-easing in vegetable prices, and favourable rabi crop prospects. Core inflation is expected to rise but remains moderate,” said the RBI Governor.

4. External sector remains resilient

RBI Governor underscored India’s external sector remains resilient as key indicators stay robust.

He pointed out that India’s current account deficit (CAD) moderated from 1.3 per cent of GDP in Q2 of last year to 1.2 per cent in Q2 of this year.

“The CAD for this year is expected to remain well within the sustainable level. As of 31st January this year, India’s foreign exchange reserves stood at 630.6 billion US dollars, providing an import cover of over 10 months,” he said.

5. Liquidity conditions

The RBI Governor said system liquidity – as measured by the average net position under the liquidity adjustment facility (LAF) – turned into deficit during December 2024 and January 2025.

The drainage of liquidity is mainly attributed to advance tax payments in December 2024, capital outflows, forex operations and a significant pickup in currency in circulation in January this year, he said.

“The Reserve Bank is committed to providing sufficient system liquidity. We have taken a number of steps in this regard.29 We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions,” Governor Malhotra said.

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