After a wait of nearly five years, the Reserve Bank of India (RBI) Friday announced a cut in interest rate to push for growth as inflation showed signs of easing.

In Sanjay Malhotra’s first monetary policy after he assumed office as RBI Governor in mid-December, the repo rate has been lowered by 25 basis points to 6.25%. His predecessor, Shaktikanta Das, had left the key policy rate unchanged for 11 consecutive times.

The repo was last trimmed in May 2020, with the RBI reducing it by 40 basis points to 4%. With Covid-19 and inflation grabbing centre stage, the central bank then had the repo rate raised six times by an aggregate of 250 basis points.

This decision has brought the RBI’s monetary policy in alignment with the Centre’s fiscal policy. Finance secretary Tuhin Pandey, after the budget, had said that the “fiscal policy and the monetary policy need to work in tandem, not at cross purposes”.

The RBI-led monetary policy committee (MPC), which met between February 5 and 7, voted unanimously for the repo rate cut.

Malhotra said the MPC noted a decline in inflation due to favourable outlook on food prices and continuing transmission of previous RBI monetary policy actions.

"These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target. Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25 basis points to 6.25%," Malhotra said.

The repo is the interest rate at which the RBI lends money to commercial banks.  

In the monetary policy just announced, the standing deposit facility (SDF) rate has also been adjusted to 6% from 6.25%, while the marginal standing facility (MSF) rate and the bank rate has been adjusted to 6.5% from 6.75%.

The MPC also decided unanimously to continue with its 'neutral' stance and remain "unambiguously focused on a durable alignment of inflation with the target while supporting growth".

The cash reserve ratio (CRR) will be maintained at 4%.

Growth forecast

The RBI forecasts the GDP growth rate to rebound to 6.7% in FY26, after this year’s wobble. 

In early January, the National Statistics Office (NSO) forecast that the GDP growth rate would fall to 6.4% this fiscal from 8.2% in the previous year.

“I would like to stick my neck out and say that India can achieve a 7-per-cent-plus growth rate. We should certainly aspire (to) that,” the RBI governor said.

Gross domestic product (GDP) quarter-wise forecast for FY26 is: 

Q1FY26: Revised downwards to 6.7% from 6.9%

Q2FY26: Revised downwards to 7% from 7.3%

Q3FY26: 6.5% 

Q4FY26: 6.5%

CPI-based inflation forecast

The MPC forecasts inflation to fall to 4.2% in FY26, which is close to the median of the RBI’s 2-6% inflation mandate.

For FY25, RBI maintained its projections for consumer price index (CPI)-based inflation at 4.8%, with a slight drop to 4.4% in the last quarter of this fiscal.

Inflation quarter-wise forecast for FY26 is:

Q1FY26: 4.5% from 4.6%

Q2FY26: 4% from 4%

Q3FY26: 3.8%

Q4FY26: 4.2%