RBI cuts interest rates for 1st time in 5 years; loan EMI to come down

Barely a week after the Centre cut personal income tax to boost consumption, the Reserve Bank of India's (RBI) six-member Monetary Policy Committee (MPC) cut the repo rate, the rate at which the RBI lends to other banks, by 25 basis points to 6.25 per cent.

This is the first rate cut initiated by the RBI since 2020 and it is anticipated that it will boost consumption.

Currently, the repo rate is 6.5 per cent. The MPC, which comprises three RBI members and three external members, had last reduced the repo rate in May 2020 and had kept the rate unchanged in the last 11 policy meetings.

In its December 2024 Monetary Policy Committee meeting, the RBI kept the repo rate unchanged at 6.5 per cent.

During the meeting, which took place between February 5 and 7, MPC members unanimously voted to cut the repo rate.

According to experts, this potential rate cut will align with the budget's objectives of stimulating economic activity while managing a prudent fiscal position, which provides comfort on currency and inflation fronts.

A rate cut will be beneficial for the real estate sector as it will make borrowings more affordable for home buyers and reinstate consumer sentiment, particularly in the lower and mid-income segments.

It will also potentially enhance liquidity in the banking system, making it easier for developers to access financing for their projects. Also, the Gross Domestic Product (GDP) forecast for financial year 2025-26 (FY26) has been pegged at 6.7 per cent. For FY25, RBI maintained its projections for consumer price index (CPI)-based inflation at 4.8 per cent.