RBI Cuts Repo Rate by 25bps - What it Means for the Economy and Policy

The RBI lowered its repo rate by 25 basis points to 6.25%. This is the first rate cut since 2020. All six members of the Monetary Policy Committee (MPC) agreed on the rate cut, and the RBI kept a “neutral” stance for future policy.

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This policy meeting came against a backdrop of mixed economic signals

• Weak growth and falling inflation called for a rate cut to support the economy.

• However, global uncertainty and financial market volatility made the RBI cautious, so they chose a gradual approach.

Key Points from the Policy

1. Flexibility in Inflation Targeting:

   • The RBI will focus more on its future inflation forecast (whether it’s moving toward 4%) instead of current inflation levels when deciding on rates.

   • The RBI will also improve its forecasting methods to guide future policy.

2. Growth and Inflation Forecasts:

   • GDP growth for FY26 expected to average 6.7%.

   • Inflation expected to reach 4.2% by FY26.

3. Liquidity Measures:

   • The RBI is committed to providing enough liquidity but will avoid flooding the system.

   • The RBI has already injected INR 2 trillion in liquidity, but no new measures were announced, which disappointed some market participants.

4. Regulatory Updates:

   • Concerns about changes in the Liquidity Coverage Ratio (LCR) and other regulations were addressed.

   • The RBI mentioned any changes would be gradual, with the LCR deadline pushed to March 2026.

Summary

The RBI cut the repo rate by 25bps to 6.25%, focusing on future inflation forecasts while maintaining a cautious approach. The decision was unanimous, with no immediate changes to liquidity regulations. Further rate cuts and measures are expected as the RBI monitors economic conditions.