RBI announces first rate cut in nearly 5 years, keeps stance 'neutral'

Monetary policy committee decides to reduce policy rate by 25 basis points to 6.25%, says RBI Governor Sanjay Malhotra

The Reserve Bank of India (RBI) cut its key repo rate for the first time in nearly five years on Friday to provide stimulus to the sluggish economy, which is expected to grow at its slowest pace in four years in the current fiscal year.

 

The six-member monetary policy committee (MPC), which consists of three RBI and three external members, reduced the repo rate by 25 basis points to 6.25 per cent from 6.5 per cent. All six MPC members voted to cut the repo rate and to maintain the monetary policy stance at "neutral".

 

The cut comes after the MPC kept rates unchanged for 11 consecutive meetings, following a 250 basis point increase from May 2022 to February 2023. The repo rate had remained at 6.5 per cent since April 2023, aiming to control inflation and bringing it back to the medium-term target of 4 per cent.

 

The MPC noted that though growth is expected to recover, it is much lower than last year and inflation dynamics have opened space for rate easing, said RBI Governor Sanjay Malhotra in the first policy review since his appointment in December.

 

The MPC remains focused on supporting growth while continuing efforts to align headline inflation with the 4 per cent target, he said.

 

Inflation eased to a four-month low of 5.22 per cent in December, down from 5.48 per cent in the previous month, as food prices provided some relief. However, December marked the fourth consecutive month of inflation exceeding 5 per cent. Food inflation also moderated, falling to 8.4 per cent from 9 per cent in November, dipping below 9 per cent for the first time in four months.

 

The rupee remained steady at its opening level of 87.45 per dollar after the monetary policy decision was announced. Traders said the RBI intervened in the foreign exchange market ahead of the policy announcement to curb excess volatility.

 

“The opening was around 87.45, but before 9, the rupee was at 87.58. The RBI was there with banks,” said a dealer at a state-owned bank. The rupee had settled at 87.59 per dollar on Thursday.

 

Government bond yields rose by 3 basis points to 6.69 per cent because the RBI did not announce any additional liquidity measures, said dealers.

 

After reviewing current liquidity and financial conditions, the RBI announced a series of measures to inject durable liquidity into the banking system. These include open market operation (OMO) auctions of government securities totalling Rs 60,000 crore in three tranches of Rs 20,000 crore each on January 30, February 13, and February 20. Additionally, a 56-day variable rate repo (VRR) auction for Rs 50,000 crore will be held today, and a USD/INR buy/sell swap auction of $5 billion for a six-month tenor was conducted on January 31.