RBI Cuts Repo Rate from 6.5% to 6.25% for the First Time in the Past 5 Years

The much-awaited news is finally out! 

The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points (bps), bringing it down to 6.25%. This marks the first rate cut in nearly five years. Previously, the rate cut happened in March 2020 when it was brought down by 75 basis points to 4.40%.

RBI Governor Sanjay Malhotra announced the decision, which was made during the 3-day Monetary Policy Committee (MPC) meeting held from February 5, 2025, to February 7, 2025.

He stated,
"The Monetary Policy Committee unanimously decided to reduce the policy rate by 25 basis points from 6.5% to 6.25%!"

As a result, the standing deposit facility (SDF) rate has been revised to 6.00%, while both the marginal standing facility (MSF) rate and the Bank Rate have been adjusted to 6.50%.

RBI Repo Rate Cut History

As you can clearly see, the repo rate was last slashed in 2020, and since then, it has only increased or stayed the same. 

Implications of the RBI Repo Rate Cut

• On Economy 

The primary reason behind the rate cut was to stimulate economic growth. These measures align with RBI’s goal of achieving a medium-term consumer price index (CPI) inflation target of 4%, within a permissible range of ±2%.

According to RBI, a good rabi harvest and a recovery in industrial activity are expected to support economic growth in 2025-26. Business investments are also expected to grow along with support from Services exports. 

However, global risks, such as trade restrictions, rising commodity prices, etc., could slow down progress. 

Taking all the positive and negative factors into account, real GDP growth for 2025-26 is estimated at 6.7%, with 

• Q1 at 6.7%, 
• Q2 at 7.0%, and 
• Q3 and Q4 at 6.5% each.

• On Inflation 

Going forward, the rate cut is expected to have a mixed impact on inflation. Lower borrowing costs may boost demand, but food inflation pressures are likely to ease due to good Kharif production, lower vegetable prices in winter, and a strong rabi harvest.

However, global financial market uncertainty, fluctuations in energy prices, etc, could push inflation higher. 

Considering all the positive and negative factors, CPI inflation for 2025-26 is projected at 4.2%, with

• Q1 at 4.5%, 
• Q2 at 4.0%, 
• Q3 at 3.8%, and 
• Q4 at 4.2%
  

• On Loans 

This is one of the most asked questions:

How rate cut will impact the loans? Will the interest rates dip?

Yes, a repo rate cut generally leads to lower interest rates because a lower repo rate reduces the cost at which banks borrow from the RBI.
When Banks and NBFCs pass on this benefit to borrowers, they can enjoy reduced loan interest rates, but the extent depends on how banks adjust their lending rates.
Those with floating interest rates on existing loans may also see a decrease in EMIs.
Lower interest rates encourage individuals to take out loans to purchase homes, cars, and other big-ticket items.

After the announcement of No Income Tax for Earnings up to ₹12 Lakh in the Union Budget, this news will be a significant relief for the middle class.

• On Mutual Funds

A repo rate cut by the RBI impacts mutual funds differently based on their category. For instance, Debt mutual funds, especially long-duration funds, tend to benefit as bond prices rise when interest rates fall. However, short-term debt funds may see lower returns due to declining short-term yields.

• On FDs (Fixed Deposits) 

On the flip side, those who have invested in FDs might not be happy with rate cuts as depositors may see a decline in interest rates on fixed deposits and other savings instruments due to rate cuts.

In short, FD interest rates will go down due to rate cuts.  

Conclusion

Analysts will closely monitor the impact of policy change in the coming months and assess its effectiveness in revitalizing economic growth while keeping inflation in check. 

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.