New Delhi (TIP)- Corporate and retail loans (including home loans) will get cheaper as the Reserve Bank of India’s Monetary Policy Committee (MPC) pivoted its policy by cutting the policy rate for the first time in five years, with analysts expecting another cut in April when the committee meets next.
The quantum of the rate cut — 25 basis points or 0.25 percentage points to 6.25% — was in line with expectations although it disappointed the more optimistic analysts who were hoping for a 50-point cut, and the stock markets which had already factored in a 25 basis point cut.
The rationale for the rate cut is laid out in RBI’s projections for the year. It expects the GDP to expand by 6.7% in 2025-26, with quarterly growth estimates of 6.7%, 7%, 6.5% and 6.5%. In December, it estimated growth to be 6.9% in the first quarter of the year and 7.3% in the second — and so the latest numbers suggest that there is a challenge to growth. In its December policy, MPC also overestimated the 2024-25 annual growth by 20 basis points at 6.6%. According to the first advance estimates released in January, GDP growth in 2024-25 is expected to be 6.4%. It also expects inflation for the year to be 4.2%, close to RBI’s target of 4% (in fact, the closest it will be since India adopted an inflation targeting framework for tis monetary policy. If the annual inflation projection of RBI were to materialise, it will be the lowest annual inflation number since 2018-19 when it came in at 3.4%
Clearly, RBI’s MPC?has decided (unanimously) that it needs to support what is clearly seen as slowing growth momentum in the Indian economy. Its policy stance continues to be cautious (neutral), which is understandable given the turbulent external environment. The neutral stance, however, could also be taken as a hint of more cuts to come.
Already in January, RBI has, through other measures, announced the introduction of around Rs 1.5 lakh crore of liquidity in the system.
RBI’s rate cut is likely to bring cheer to retail and corporate borrowers — RBI governor Sanjay Malhotra, presiding over his first MPC meeting after taking over, has said it could take up to two quarters for the reduction to be transmitted — with the almost five-year-long monetary tightening cycle increasing interest payments. In the case of home loan buyers, for instance, it increased loan durations (since most lenders and borrowers preferred to keep payments the same). That could well boost consumption, adding to the boost already provided by the income tax rebate and slab rate changes announced by the Union finance minister on February 1 (which is estimated at Rs 1 lakh crore).
To be sure, a lot of the inflation-growth dynamics will depend on the performance of this year’s monsoon, which RBI hopes will be normal.
MPC last reduced repo rate in May 2020 when it brought it down to 4%, a massive 1.15 percentage point reduction from the 5.15% level in February 2020 to cushion the pandemic’s impact on the Indian economy. Prior to Friday’s decision, the rate had stayed unchanged at 6.5% since February 2023.