RBI Slashes Repo Rate by 50 Basis Points to 5.5%, Shifts Policy Stance to Neutral

Mumbai: In a move aimed at stimulating economic growth, RBI Governor Sanjay Malhotra on Friday announced a significant 50 basis point cut in the repo rate, bringing it down from 6% to 5.5%. This decision comes as inflation has fallen below the Reserve Bank’s lower target band of 4%.

Additionally, the RBI has announced a 100 basis point cut in the Cash Reserve Ratio (CRR), which will be implemented in four equal phases of 25 basis points each, starting on September 6, followed by October 4, November 1, and November 29. This is expected to infuse approximately ?2.5 lakh crore into the banking system, enhancing liquidity and facilitating better credit flow.

Lower interest rates reduce the cost of borrowing for businesses and consumers, potentially boosting consumption, investment, and overall economic activity. However, the real impact of the rate cut will depend on how quickly and effectively commercial banks pass on the reduced rates to borrowers.

Governor Malhotra noted that with this move, the repo rate has been reduced by a full 100 basis points since February this year. In light of this, the RBI has shifted its monetary policy stance from “accommodative” to “neutral,” allowing the central bank more flexibility to respond to changing inflation and growth dynamics.

Malhotra stated that inflation has now moderated to 3.2%, supported by a broad-based decline in prices. As a result, the RBI has revised its inflation forecast down from 4% to 3.7%, signaling a stable inflation environment aligned with its target range.

Highlighting India’s economic strength, the Governor said the country remains the fastest-growing major economy. He pointed to strong balance sheets across the corporate sector, banking system, and government, along with a stable external sector, as indicators of solid economic fundamentals. He also emphasized India’s appeal to both domestic and international investors, driven by its demographics, digital transformation, and growing domestic demand.

Malhotra also mentioned that uncertainties around rabi crop production have eased, with the second advance estimates pointing to record wheat yields and increased pulse production. Robust kharif arrivals are expected to help further ease food inflation.

The RBI added that the significant decline in inflation expectations would help keep future inflation in check. Additionally, the drop in global crude oil prices is expected to support the positive inflation outlook.

The Governor concluded by reiterating that the Indian economy offers immense potential for investment, supported by strong macroeconomic indicators and long-term structural advantages.

With inputs from IANS