RBI has reduced its key interest rate to make borrowing cheaper and reduce the impact of US tariffs
India’s central bank cut its key interest rate for the second time this year on Wednesday. The 0.25 bps cut to the repo rate from the previous 6.25% is expected to decrease borrowing costs for both consumers and businesses, with the goal of boosting economic activity, according to the bank.
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends to commercial banks for their short-term needs. Adjusting this rate is a major tool to manage liquidity and control inflation.
The RBI’s cut also comes at a time when the US has imposed reciprocal tariffs of 26% on the world’s fifth largest economy.
The RBI said in its monetary policy statement on Wednesday that the increased tariffs had led to greater uncertainties, obscuring the economic outlook worldwide and creating additional challenges for global growth and inflation.
Governor Sanjay Malhotra said that in light of all this, the central bank will transition from a “neutral stance” to an “accommodative” one. This refers to an approach where a central bank adopts a supportive and expansionary policy to stimulate economic growth and stability.
Malhotra said, “the dent on global growth due to trade frictions will impede domestic growth and higher tariffs shall have a negative impact on net exports.”
Adding that he was “more concerned” about growth, the governor hinted at more rate cuts this year. He also cautioned that uncertainty in itself “dampens growth by affecting investment and spending decisions of businesses and households.”
However, Malhotra noted that India was better equipped to handle the tariff increases due to its smaller trade surplus with the US and also because tariffs imposed on the country were lower than those for other major economies.
Wednesday’s rate cuts need to be seen in the light of a slowdown in India’s economy. India’s GDP grew by 6.2% in the fourth quarter of 2024, which was lower than expected, and the economy is projected to grow by 6.5% in the financial year ending March 2025, a significant decline from the 9.2% growth seen in the previous year.
The RBI said that it cut interest rates due to a “decisive improvement” in the inflation outlook, and is confident that inflation will meet its 4% target within the next 12 months.
Indian Finance Minister Nirmala Sitharaman, who is in London on an official visit, said on Tuesday that India’s economy is expected to remain a key driver of growth due to its resilience and strong domestic demand, despite the changing global trade dynamics caused by US tariffs.
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