Editor's Take | Why RBI's 25 bps repo rate cut is a strategic move

In a significant move aimed at supporting India's economic recovery, the Reserve Bank of India (RBI) has reduced its benchmark interest rate by 25 basis points (BPS), bringing the repo rate to 6.25%. This is the first interest rate cut in nearly five years and comes at a time when India's economic growth is projected to hit its lowest point since the pandemic, with GDP expected to grow around 6.7% this year.

S Srinivasan, Editor-in-Chief of The Federal, provided insights on this policy change and its potential impacts on various sectors of the economy. According to Srinivasan, the rate cut is expected to benefit the banking sector by increasing liquidity in the financial system. “Banks should feel better now, as more liquidity will be available, which could result in more credit flow. This is a strategic move that aligns with the broader fiscal policies of the Government of India and RBI,” Srinivasan said.

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The decision follows the Finance Minister’s announcement of significant tax cuts for the middle class, which is designed to boost consumption and stimulate economic growth. Srinivasan pointed out that this move by the government was a clear signal that the RBI would need to adjust its monetary policy accordingly. “The tax cuts were an indication that the RBI would have to reduce rates, and today’s move was expected,” he added.

Taken a cautious stand

However, while the rate cut provides a short-term boost, the RBI has maintained a cautious stance regarding future rate reductions. The central bank's guidance has remained neutral, with Governor Sanjay Malhotra emphasising that further rate cuts will depend on both domestic economic factors and global conditions. Srinivasan noted that this cautious approach signals a slow pace for any future rate reductions. “The RBI’s stance is neutral, which means we are unlikely to see aggressive cuts anytime soon. The Governor has made it clear that both domestic recovery and external factors—such as global inflation—will play a role in shaping future decisions,” he explained.

One of the key areas that the RBI’s rate cut is expected to impact is consumer spending. While inflation is projected to stabilize near 4%, with food inflation likely to ease due to better agricultural output, consumption trends remain uneven. According to Srinivasan, rural consumption has shown resilience, but urban demand has been relatively subdued. “Urban consumption continues to lag, while rural areas are performing better. However, with the rate cut and the tax benefits coming through, there is hope that urban consumption will pick up in the coming months,” he said.

Boost for real estate

In particular, the real estate sector—especially affordable housing—could see some benefits from the rate cut. Affordable housing, which includes properties priced under ₹60 lakh, has been struggling in recent years due to high borrowing costs. While the rate cut makes home loans more affordable, Srinivasan cautioned that it’s not guaranteed that banks will fully pass on the benefits to consumers. “It’s not necessary that the entire 25 BPS cut will be passed on to the consumer. If banks do pass on the benefits, it could help revive demand in affordable housing, but we’ll have to wait and see,” he said.

'Might take time to see benefits'

Despite these positive expectations, Srinivasan warned that the full effects of the rate cut may take time to materialise. The lag between monetary policy changes and their real-world impact, particularly in sectors like real estate, means that recovery may not be immediate. "The full impact of this decision won’t be felt overnight. It will depend on how banks react and whether they pass on the benefits quickly enough to spur spending," he concluded.

As India navigates this challenging economic environment, the RBI’s decision to cut rates is a step in the right direction. However, much will depend on how effectively the banking sector responds, and whether consumer demand picks up in both urban and rural markets.

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