The Reserve Bank of India (RBI) recently lowered its key interest rate, called the repo rate, from 6.5% to 6.25%. This is the first time in five years that the RBI has reduced the rate. The purpose of this rate cut is to make borrowing cheaper, Which encourages people and businesses to spend and invest more, meaning it will remain flexible and adjust its approach as the economic situation changes. This decision comes shortly after the government cut personal income tax to further encourage spending.
Improving economic forecasts
RBI Governor Sanjay Malhotra explained that the current inflation targeting framework has been effective for the Indian economy, even through challenges like the pandemic. Since it was introduced, inflation has mostly stayed within the target range, though there were few times it went over the limit. He added that the RBI and the Monetary policy committee (MPC) will continue to use the flexibility of this framework to improve the economy by adjusting to changing conditions. They will also refine the framework by using better data, improving economic forecasts, and developing stronger models.
Reasons Behind Dollar’s Rise Against Major Currencies
This announcement came amid global uncertainty, with US president Donald Trump announcing tariffs on Canada, Mexico, and China. While tariffs on Canada and Mexico were delayed for a month, concerns about a potential global trade war have caused the dollar to rise against other major currencies.
GDP Projected to Grow by 6.7%
RBI Governor Sanjay Malhotra stated that the central bank expects India’s GDP to grow by about 6.7% in the next fiscal year. The government’s economic Survey, released before the Budget, projected a growth rate of 6.3-6.8% for 2025-26, driven by factors like a strong external account, controlled fiscal spending, and stable private consumption. This comes as the economy is slowing, with an estimated growth of 6.4% for 2024-25, the slowest in four years.
Shashi Rai
