India’s central bank cut its key interest rate for the first time in nearly five years on Friday to provide stimulus to the economy, which is expected to grow at its slowest pace in four years in the current fiscal year. The central bank also sees inflation easing towards its 4 percent target.
The Monetary Policy Committee (MPC), which consists of three Reserve Bank of India (RBI) and three external members, cut the repo rate by 25 basis points to 6.25 percent after keeping it unchanged for eleven consecutive policy meetings. All six MPC members voted to cut the rate and to maintain the monetary policy stance at “neutral.”
India’s central bank last cut the key interest rate in May 2020, after which it implemented a series of hikes to slow down rising inflation amid the COVID-19 pandemic.
Inflation slows to four-month low
The committee noted that although growth is expected to recover, it is much lower than the 8.2 percent growth seen in 2023-2024 and inflation dynamics have opened space for rate easing. Moreover, improving employment conditions, recently announced tax cuts, declining inflation and good agricultural output will further support growth.
Despite retail inflation remaining well above the RBI’s medium-term target of 4 percent, it eased to a four-month low of 5.22 percent in December and is seen gradually declining towards the target in the coming months. The central bank sees inflation averaging 4.8 percent in the current financial year and easing to 4.2 percent next year.
Read: Bank of Korea plans additional rate cuts in 2025 as prices stabilize
Tax break to boost consumption
The central bank’s announcement comes days after the federal government of India unveiled income tax cuts in its annual budget. The tax cuts raise the threshold at which workers are taxed on income from about $8,000 to $14,800.
India’s economic growth has been slowing over the past few months, largely due to a drop in urban consumption. Urban Indians have been spending less because wages haven’t kept pace with high inflation and high taxes.
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