The Reserve Bank of India reduced the standard repo rate by 25 basis points to 5.25%. The move was made after the Monetary Policy Committee reached a decision following a three-day meeting that ended on 5 December. The move was announced in the policy address by Governor Sanjay Malhotra. He observed that inflation has been stable amid firm economic activity, which encourages the transition to a lower-rate environment.
The central bank maintains a neutral stance of policy. The change is projected to achieve growth without inflationary pressure for the officials. A basis point is one-hundredth of a percentage point, and it is the first time that the committee has taken action in six months.
RBI estimates the GDP growth of India to be 7.3% this year, as compared to the previous estimates of 6.8%. The outlook is optimistic on domestic demand and investment. Inflation will also reduce to 2% within FY26, compared to an earlier estimate of 2.6% in the bank. The consistent price outlook provides the central bank with additional possibilities to promote growth.
The MPC is going to carry out 1 lakh crore open market purchases in the near future. It will also conduct a 5 billion dollar-rupee swap in December so as to control the liquidity. These measures will ensure that financial situations are smooth as markets adapt to the change in rates.
The market players were waiting to see some clear signals after months of consistent policy. The announcement made the rupee stronger, and it was trading close to 89.77 against the dollar. The 10-year bond yield in India also dropped to 6.46%, by six basis points, as an indication of a positive reaction to the cut by the market.
A majority of the economists who were surveyed before the meeting anticipated a reduction in the rate. The view was supported by soft inflation and substantial growth grounds. The recent downward trend in the rupee, however, casts doubt on when such a move could take place.
Analysts believe the cut must not depreciate the currency to a large extent. The interest rate difference between India and the United States is supported by expectations of a decrease by the Federal Reserve of the United States later this month. This aspect can provide a rescue to the rupee in the short run.
According to Governor Malhotra, the economy is still performing well despite the challenging world environment. He noted that the prospect of inflation provides room to pursue a growth strategy. The main goal of the central bank is to maintain the economy in a balanced Goldilocks state whilst observing the external risks.