RBI Rate Cut of 25 bps: Major Highlights

RBI has announced a rate cut of 25 basis points after five years, reducing the repo rate from 6.50% to 6.25%. Here are the key highlights of the RBI MPC announcements made by the Governor Sanjay Malhotra on February 7, 2025:

• MPC declared the policy repo rate cut under the liquidity adjustment facility (LAF) by 25 bps to 6.25%
• The standing deposit facility (SDF) rate shall stand adjusted to 6.00% and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%
• It continues with the neutral monetary policy stance and remains unambiguously focussed on a durable alignment of inflation with the target while supporting growth.
• Excessive volatility in global financial markets and continued uncertainties about global trade policies coupled with adverse weather events pose risks to the growth and inflation outlook.

What is the Repo Rate?

The repo rate is the interest rate at which the RBI lends money to banks. When the repo rate is decreased, borrowing costs get lowered, prompting banks to extend more loans to businesses and individuals, which in turn stimulates economic growth.

RBI MPC Announcement: CPI Inflation

• Its objective is achieving the medium-term target for CPI inflation of 4% within a band of +/- 2% while supporting growth.
• CPI inflation for FY 2024-25 is projected at 4.8% with Q4 at 4.4%.
• Assuming a normal monsoon next year, CPI inflation for FY 2025-26 is projected at 4.2% with Q1 at 4.5%; Q2 at 4.0%; Q3 at 3.8%; and Q4 at 4.2%.

RBI GDP Forecast

• GDP is estimated to grow at 6.4% in FY 2024-25.
• Looking ahead, healthy Rabi prospects and an expected recovery in industrial activity should support economic growth in FY 2025-26.
• GDP growth for FY 2025-26 is projected at 6.7% with Q1 at 6.7%; Q2 at 7.0%; and Q3 and Q4 at 6.5% each.

Benefit of RBI Rate Cut Decision

RBI rate cut announcement directly means lower interest rates on home loans, car loans, and personal loans leading to higher demand from consumers. It will also reduce the EMIs for borrowers who have taken loans at floating interest rates.

It can lead to growth in stocks of rate-sensitive sectors such as banking, automobiles, consumer durables, and real estate. Companies’ earnings could rise after higher spending from consumers and lower interest outgo from their profits.

Conclusion

This announcement of the RBI rate cut is a positive move for the economy as the banks can provide loans to customers at lower interest rates. It can boost liquidity, spending, and investment in the economy. It can also promote economic growth, higher corporate earnings, and boost rate-sensitive stocks such as BFSI, automobiles, and real estate.

Reference:
SMC Global Securities Research Team