India Cuts Key Interest Rate for the First Time in Five Years: A 0.25% Reduction to 6.25%

India's Central Bank Implements First Rate Cut in Almost Half a Decade Amidst Slowing Economic Growth and Inflationary Pressures

India's central bank, the Reserve Bank of India (RBI), has decided to reduce its key interest rate for the first time in almost five years. The decision to cut the rate by 0.25% to 6.25% comes as the country's economic growth outlook has been downgraded to its lowest point in four years, driven by weaker manufacturing performance and declining corporate investment.

In a meeting held on February 7, 2025, the RBI's Monetary Policy Committee announced the reduction of the key interest rate by 25 basis points (1 basis point = 0.01 percentage points). This marks the first rate cut since May 2020, after a series of 11 consecutive rate freezes. The current 6.25% is the lowest rate since January 2023.

Sanjay Malhotra, who assumed the position of RBI Governor in December 2024, highlighted that India's growth rate this year would be considerably lower than the previous year. He pointed to inflationary trends as a contributing factor, providing the RBI with the flexibility to implement a rate cut. Despite inflation still being above the RBI’s medium-term target of 4%, it has moderated significantly, falling to 5.22% in December 2024—the lowest in four months.

The Indian government has revised its growth forecast for the current fiscal year, adjusting it from 6.5% to 6.4%, due to persistent challenges in the manufacturing sector and slower corporate investments. For the next fiscal year, India’s GDP growth is projected to range between 6.3% and 6.8%.

The central bank's revised inflation forecast suggests a slight easing, with consumer price inflation expected to average 4.8% this year and 4.2% in the next. While food inflationary pressures are anticipated to ease, the RBI has cautioned that the volatility in energy prices poses a risk to inflation projections, potentially causing future inflationary fluctuations.

The RBI's decision to lower interest rates aligns with broader global trends in central bank policies aimed at stimulating economic recovery while managing inflationary expectations. With India facing a challenging economic environment, the rate cut is seen as a strategic move to boost investment and consumption, paving the way for a more sustainable economic recovery.