RBI: India's central bank slashes rates after five years

In response to the slowdown in Asia's third-largest economy, the Reserve Bank of India recently announced a cut in interest rates, marking the first such move in nearly five years. This decision aims to stimulate economic activity and boost investor confidence amidst concerns about growth.

The Reserve Bank of India (RBI) announced a reduction in the repo rate from 6.5% to 6.25%, a move that aligned with the expectations of many economists. The repo rate represents the interest rate at which the central bank lends money to commercial banks, influencing overall borrowing costs in the economy.

This rate cut comes at a time when India's gross domestic product (GDP) growth has slowed to a four-year low of 6.7%. Reserve Bank of India Governor, Shaktikanta Das, stated that the bank will continue to maintain a "neutral" policy stance, which will provide greater flexibility to support economic growth, hinting at potential further rate cuts in the future.

Nonetheless, Mr. Das indicated that moderating inflation, increased rural demand, and favorable agricultural output will contribute to economic growth. This rate cut is likely to lead to a slight decrease in mortgage and credit card rates, as well as reduce borrowing costs for businesses, potentially spurring investment and consumption.

Previously, the Reserve Bank of India had announced a series of measures, including injecting $18 billion (approximately £14.48 billion) into the domestic banking system to alleviate cash shortages in the economy. Furthermore, the bank also reduced the cash reserve ratio (the reserves that commercial banks are required to maintain with the Reserve Bank of India) by 0.5 percentage points last December. The Reserve Bank of India's interest rate adjustment closely follows the Indian federal budget's $12 billion tax cut for the middle class.

Despite this, the Modi government remains committed to controlling spending in order to reduce the budget deficit. With limited scope for fiscal stimulus, economists anticipate that the Reserve Bank of India will further cut interest rates by 0.5% to 1% to support economic growth. However, global uncertainties, such as the tariff war initiated by U.S. President Donald Trump, capital outflows from foreign investors, and currency depreciation, are complicating the Reserve Bank of India's task. The Indian rupee's exchange rate has approached historic lows due to significant withdrawals from the stock market by foreign investors in recent months.