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India has caught everyone’s attention by slashing its key interest rate for the first time in nearly half a decade. This strategic move by the Reserve Bank of India (RBI) is aimed at jump-starting the country’s economic growth and tackling the broader economic slowdown in the world’s most populous nation.
In a unanimous decision that didn’t surprise economists, the RBI lowered the main repo rate by 0.25 percentage points, bringing it down to 6.25 percent. “At this point, a less restrictive monetary policy is the way to go,” explained Sanjay Malhotra, the RBI Governor who stepped into the role last December after serving as a revenue secretary. He anticipates continued easing of inflation, which stood at 5.2 percent in December.
Policymakers are making this shift in response to India’s cooling economy. While India still leads the pack in GDP growth among major economies, challenges like high consumer prices, stagnant wages, weak spending, and underwhelming corporate earnings are evident.
From July to September, GDP growth dropped to 5.4 percent, a figure not seen in nearly two years. With the government predicting a 6.4 percent growth rate for this fiscal year, it’s clear that the economy is not the powerhouse it was in recent times, particularly compared to an 8.2 percent growth rate in 2023-24.
When New Delhi chose Malhotra over extending a third term to the more conservative Shaktikanta Das, it was viewed as a sign that Prime Minister Narendra Modi was no longer willing to endure high borrowing costs.
Post-pandemic, India had been diligently hiking its repo rate to manage rising prices, which had hit rural and middle-class consumers hard. Under Das, the interest rate held steady at 6.5 percent for two years, but his tenure was marked by criticism from within Modi’s government, especially when inflation began scaling past the central bank’s target range late last year.
Interestingly, India proceeded with the rate cut despite its currency, the rupee, reaching new lows. The rupee has depreciated by roughly 2 percent against the dollar, which raises the specter of imported inflation.
Since Malhotra took over, the central bank recently unveiled an $18 billion initiative to inject liquidity into the banking system, a move seen by many as indicative of his intention to lean towards a looser monetary strategy.
At the same time, Modi is making moves to bolster domestic consumption. The latest budget includes tax breaks for middle-class families, with Finance Minister Nirmala Sitharaman noting that this could “leave more money in their hands, boosting household consumption, savings, and investment.”
