In a significant move to stimulate India’s slow economy, the Reserve Bank of India (RBI) reduced its benchmark repo rate by 25 basis points, bringing it down to 6.25% from 6.5%. This marks the first rate reduction in nearly five years and reflects a shift towards a more accommodative stance under the leadership of Governor Sanjay Malhotra.

Logic Behind the Rate Cut:

The decision to reduce the repo rate was unanimously agreed upon by all members of the Monetary Policy Committee (MPC). Governor Malhotra mentioned declining inflation rates as a key factor behind the move. In December, headline inflation stood at 5.2%, and forecasts indicate a continued downward trend in the coming months.

Economic Factors:

India’s Gross Domestic Product (GDP) growth has recently slowed to 5.4%, raising concerns about the nation’s economic momentum. The government has projected a 6.4% growth rate for the current fiscal year, which, if realized, would be the slowest in four years. Despite being one of the world’s fastest-growing major economies, India is grappling with challenges such as high inflation, stagnant wages, subdued consumption, and weak corporate earnings.

Market Reactions:

The rate cut was met with a positive response across various sectors. Interest rate-sensitive industries, including financials, automobiles, and real estate, saw gains in the stock market following the announcement. The Nifty 50 index rose by 0.35% to 23,684.2, while the BSE Sensex climbed 0.28% to 78,274.35. Notably, auto stocks increased by 1%, and real estate stocks surged by 1.5%.

Future Outlook:

In summary, the RBI’s latest repo rate cut highlights a calculated effort to support economic growth amid declining inflation and global uncertainties. The central bank’s actions reflect a balanced strategy aimed at maintaining economic momentum while ensuring financial stability.