Investing.com-- The Reserve Bank of India cut interest rates by an as-expected margin on Friday in its first policy decision under new Governor Sanjay Malhotra.
The RBI cut its benchmark policy repo rate by 25 basis points to 6.25%. Friday’s cut was the RBI’s first rate cut in nearly five years.
The central bank left its cash reserve ratio- which outlines the amount of cash reserves to be held by local banks- at 4%, after unexpectedly trimming the rate by 50 basis points in December.
Malhotra largely maintained the RBI’s neutral stance, stating that Friday’s cut came amid some recent declines in inflation.
Analysts were positioning for a cut amid growing cracks in Indian economic growth, as the country grapples with slowing consumer spending, which is a major growth driver.
The government had doled out some income tax breaks during its 2025 budget last week, aimed largely at shoring up spending.
Indian gross domestic product growth- which was the fastest in the globe over the past three years- is expected to slow further in the coming fiscal year, and is also expected to hit a four-year low- of 6.4%- in the current fiscal year.
Malhotra reiterated the 6.4% figure on Friday, but said that growth was expected to improve in the coming year. Malhotra also forecast further declines in near-term inflation, with food prices coming down on stronger crop production. He reiterated the RBI’s outlook for consumer price index inflation at 4.8% in the current fiscal year.
The RBI’s rate cut comes as Indian CPI inflation trended lower in the past two months, falling below the upper band of the RBI’s 4% to 6% target. But the print remained well above the lower band of the RBI’s target, with few signs that it will reach the target in the near-term.
The central bank expects inflation to trend steadily above its target in 2025 and 2026.
Friday’s policy decision is the first under new governor Malhotra, who unexpectedly replaced Shaktikanta Das in December, amid a growing rift between Prime Minister Narendra Modi’s government and the RBI over the need for lower interest rates.
While Das had overseen a cash reserve ratio cut in December, he had still maintained a stance that rates would remain unchanged until more convincing signs of lower inflation.
RBI to maintain rupee intervention stance, USDINR falls
Commenting on recent weakness in the Indian rupee, Malhotra said that the bank would maintain its policy of intervening in foreign exchange markets only in events of increased volatility. He also noted that the RBI was not targeting any specific exchange rate.
Malhotra’s comments spurred some strength in the rupee, with the USD/INR pair falling 0.2% from near record highs of over 87.5 rupees.
The Indian currency had weakened sharply in recent weeks amid concerns that the RBI will lessen its pace of currency market intervention amid falling reserves and heightened volatility.